EPOCH REPORT ON ARBA, FWIW.
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"My treat to ARBA longs:EPOCH PARTNERS PRIVATE CLIENT REPORT
Hey people this report is of Epoch partners which did not do any underwriting for ARBA. This report is available either to private clients which has more than $500K with EPOCH to manage or for 2K a pop. So enjoy this treat!!! So how did I get it: I have money with Epoch!
By Mark Verbeck
Managing Director and Senior Analyst
David Trainer, Tim Madda
Associate Analyst, Associate Analyst
Another Excellent Quarter; Guidance Increased. Ariba bested our revenue and EPS estimates handily, turning in an impressive 11% operating margin for the quarter. The company increased guidance for Q2 and FY01, which we view as a positive indicator of the company's pipeline despite an anticipated IT spending slowdown.
New Focus on Direct Collaboration. Ariba told the investment community to stay tuned later this quarter for announcements on new solutions aimed at direct materials and collaborative manufacturing. This effort echoes the initiatives Commerce One announced five months ago, and we believe signifies the quiet demise of the i2 Technologies alliance.
Profitability Is an Important Competitive Advantage. Ariba's ability to generate meaningful positive cash flow from operations gives it an advantage over less profitable peers in growing its business and expanding its portfolio of services to keep pace with the large potential demand coming from the relatively under-penetrated markets it is targeting.
Stay Tuned
On January 11, Ariba reported excellent first-quarter results, posting revenue of $170.2 million and EPS before non-operating charges of $0.05. Once again, Ariba deftly bested our top-line estimate of $156 million and EPS estimate of $0.03. Revenue growth was solid, increasing 26% sequentially (compared to a strong 4Q) and 625% over the first fiscal quarter of 2000. Ariba's guidance on its FY01 estimate has increased approximately 8x since it went public six quarters ago.
Gross margins were level with last quarter at 82% while Ariba achieved impressive operating margins of 11% in its first quarter of profitability. We believe this represents a solid quarter on all fronts, and demonstrates superior execution. Looking ahead, we believe Ariba will continue to execute and offer investors strong growth even in a challenging environment for IT spending.
Ariba continued to guide investors higher on the growth of its business, increasing estimates for 2Q and FY01 to $185 million and $790 million, respectively. While we believe its pipeline remains strong, we note that the company is taking a more conservative approach to revenue and earnings guidance. Given the current economic and market environments, we believe the new CFO is taking a prudent approach to managing investor expectations. Despite the dour stock market and economic outlook, we believe that B2B infrastructure will remain a top IT priority in 2001, and occupies a relatively secure position on the spending ladder.
On the strategic side, Ariba hinted at expanding its solutions with new offerings focused on direct materials procurement and collaborative manufacturing. This effort echoes the initiatives Commerce One announced five months ago and we believe signifies the quiet demise of the i2 Technologies alliance. This effort will be crucial to Ariba's future growth.
Ariba's ability to generate positive cash flow should help it increase its market share and grow faster than its less-profitable competitors. Ariba's quicker path to profitability is the best proof of its superior business model. Indeed, with deeper pockets of cash, Ariba can invest more to grow faster by providing a larger portfolio of services to a larger pool of customers. The faster Ariba grows, the more its business scales. As deep pockets get deeper, Ariba's competitive position becomes stronger raising the bar for competitors attempting to match Ariba's profitability. Overall, Ariba is well positioned to benefit from the winner-take-most environment inherent in this industry.
Ariba outlined its intent to structure more deals under a renewable term-license model. Contracts structured as term-licenses are recognized upfront and are renewable after two to three years. Most of its marketplace wins are already structured this way and Ariba intends to license more of its buyer procurement applications in the same fashion. Currently, the majority of these are sold as perpetual licenses and recognized over a four-quarter period. The impact of this change will be to accelerate near-term revenue recognition. However, we believe the transition to more term-license sales will be slow to take effect.
Day sales outstanding (DSOs) were 63 days during the quarter. We expect DSOs to trend upwards as an increasing proportion of sales comes from international customers. Other countries generally accept longer payment cycles than the U.S. Also a greater proportion of revenues will hit the accounts-receivable balance and not deferred revenues because of the move to term-licenses. As we speculated in our earnings preview, the increase in allowance for doubtful accounts appears to have been a one-time event. The ailing dot-com customers that were the catalyst for the reserve came from sales in early 2000. The majority of Ariba's revenue (we estimate over 90%) comes from large corporations and established, well-funded industry consortia from which we anticipate little credit risk. We look for further detail when the company releases its 10-Q in the coming weeks.
Revised Ariba Estimates
2Q01 Fiscal 2001
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To:
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Revenue Change $177M $185M $763M $787M
EPS Change $0.04 $0.06 $0.18 $0.25
Source: Epoch Partners" |
