REDIT SUISSE FIRST BOSTON CORPORATION
Equity Research Americas
U.S. / Technology / b2b eCommerce
BUY
MID CAP
Ariba, Inc. (ARBA)
FQ2 Results - Into the Black Hole
Summary
FQ2:01 rev $90.7M, $500K or 1% above our $90.2M revised estimate. EPS was ($0.
20), in-line with our/street revised estimate. License rev was $58.6M, in-
line with our estimate and represented (55%) sequential growth.
Based on very low visibility, high cost structure, and no guidance from mgmt,
we are lowering our CY01 rev est by $20M to $429M (54% growth) and lowering
CY02 rev est by $57M to $389M ((11%) growth). Accordingly, we are lowering
our CY01 and CY02 ests by ($0.08) and ($0.37) to ($0.39) and ($0.37)
respectively.
Maintain HOLD
Price Target Mkt.Value 52-Week
04/19/01 (12mo.) Div. Yield (MM) Price Range
USD 7.03 None NA
Annual Prev. Abs. Rel. EV/ EBITDA/
EPS EPS P/E P/E EBITDA Share
12/02E ($0.37) (0.00) NA
12/01E ($0.39) (0.31) NA
12/00A (0.17) NA
Dec. March June Sept. FY End
2002E Sept.
2001E $0.05A ($0.20)A ($0.15) ($0.11)
2000A (0.06) (0.05) (0.00) 0.05
ROIC (12/00)
Total Debt (12/00)
Book Value/Share (12/00)
WACC (12/00)
Debt/Total Capital (12/00)
Common Shares
EP Trend2
Est. 5-Yr EPS Growth
Est. 5-Yr. Div. Growth
1On 04/19/01 DJIA closed at 10693.71 and S&P 500 at 1253.69.
2Economic profit trend.
Ariba is a leading provider of intranet- and internet-based business-to-
business electronic commerce solutions.
FQ2:2001 Investment Summary
Table 1
Updating 2001 and 2002 Revenue Estimates
2001E 2002E
New Old Change New Old Change
Rev $429.1M $449.1M ($20M) $383.9M $440.6M ($56.7M)
EPS ($0.39) ($0.31) ($0.08) ($0.37) $0.00 ($0.37)
Source: CSFB Technology Group Estimates
All comparisons based on revised estimates as of 4/2/01.
Revenue: ARBA reported in-line EPS of ($0.20) on total revenue of $90.7M (126%
y/y or (47%) q/q growth) compared to our revised estimate of $90.2M.
Management's original guidance exiting FQ1:01 had been in the $175-185M range,
our estimate was $183M. License revenue for the quarter was $58.6M (124% y/y or
(55%) q/q growth), in-line with our estimate. Network revenue, which is
comprised of maintenance and transaction revenue, came in at $19.0M, down $7.
0M or 27% from last quarter and represented 21% of total revenue. We expect
network revenue to have a similar trend line with license revenue. Service
revenue of $26.8M grew 68% on a year-over-year basis and represented 14% of
total revenue.
The significant revenue shortfall was attributed to the weak macro economic
environment and the tremendous negative effect on the marketplace business.
Many companies continued to delay IT spending decisions and it remains
unclear as to if or when marketplace demand will return. The company did not
give specific guidance on the call, leading us to believe that management is
perplexed as to when we will see recovery in this particular market and the
economy as a whole.
ARBA closed 62 deals during the FQ2:01, down from 120 last quarter, with
approximately 33% of the deals exceeding $1M. The company's ASP of $1.8M was
slightly lower than the $2M+ deal sizes seen over the previous two quarters.
ASP by product and geography were unchanged for the quarter. Indirect revenue
remained flat in the 25-30% range, with most the majority coming from strong
ties through the IBM relationship.
International accounted for 25% of total revenue, down from 30% last quarter.
The company saw overall weakness in the domestic market in comparison to non-
domestic, which was flat. ARBA did see particular strength in Japan, which
the company claims to have 60% market share..
Customers: Many customer wins during the quarter came from outside ARBA's
typical domain expertise.
Exxon Mobile will be using ARBA's Customer Service Network (CSN) to route
orders initiated by their ERP system. This win was of particular interest due
to Exxon Mobile's strong ties with SAP.
Unilever, who originally purchased ARBA Buyer for only 1 division, saw such a
significant ROI, they came back for a global rollout this quarter which will
touch over 200K employees in over 100 countries.
AT&T was a competitive win against ORCL who had been deeply embedded in AT&T
for several years prior. This win adds to ARBA's prestigious
telecommunications customer base that includes Sprint, Horizon, MCI Worldcom,
among others.
In Japan, ARBA signed 7-Eleven during the quarter. 7-Eleven plans on rolling
out ARBA buyer throughout its 8,300 stores and connecting to over 2,500
channel partners.
In the auto vertical, Hyundai purchased ARBA Sourcing to power its spare
parts exchange. In a competitive battle with CMRC, it was the strength of the
Accenture partnership that helped the company win the deal. Hyundai joins
Toyota, BMW, VW, and Honda in the automobile sector.
Expenses: Total operating expenses of $124.3M were $700K above our revised
estimate. Sales and marketing increased to 88.2% of revenue compared to 49.2%
in the prior quarter. ARBA had set out to grow the business 6 months ahead of
revenue (specifically in terms of hiring new personnel) in order to meet
demand, creating a cost structure that could not be supported by the
significant shortfall in revenue. ARBA has already begun to reduce headcount
by 30% or approximately 700 people across all areas, but with a specific
focus in the marketplace and general and administrative divisions. The
reduction in headcount will make total headcount similar to levels 6 months ago
or approximately 1,400 people.
Research and development increased to 28.2% of revenue compared with 12.2% in
the prior quarter. Although we expect R&D to decrease in whole dollars, we
anticipate the company to continue to spend heavily in this area in order to
keep pace with the competitive landscape. General and administrative expenses
represented 20.7% of revenue compared to 9.6% in the prior quarter.
Balance Sheet: (1) Cash and short-term investments decreased $63.6M to $344.4M.
Although cash from operations was near breakeven due to strong collections,
however, we expect cash balance to decline over the next 2-3 quarters, but
should not fall below $300M. Reduction in cash will stem from restructuring
charges associated with severance payments, leasing obligations, and a $9M
charge related to the termination of the AGIL merger. (2) Deferred revenue
decreased $24.6M to $210.4M. The reduction in deferred revenue stemmed from
much lighter than expected revenue in the quarter. DSO decreased 6 days
sequentially to 57 days, due to very strong collections. We do anticipate
DSOs to trend up as more business is driven from international customers.
N.B.: CREDIT SUISSE FIRST BOSTON CORPORATION may have, within the last three
years, served as a manager or co-manager of a public offering of securities for
or makes a primary market in issues of any or all of the companies mentioned.
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Copyright © CREDIT SUISSE FIRST BOSTON, and its subsidiaries and affiliates,
2001. All rights reserved.
CSFB may, to the extent permitted by law, participate or invest in financing
transactions with the issuer(s) of the securities referred to in this report,
perform services for or solicit business from such issuers, and/or have a
position or effect transactions in the securities or options thereon. In
addition, it may make markets in the securities mentioned in the material
presented in this report. PLEASE REFER TO TICKER CSFBDISC FOR IMPORTANT LEGAL
DISCLOSURES.
= = Ariba, Inc. = =ARBA:Buy
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