Deferred revenue is $153 million but no one here seems to count that?
Glenn - I just spent some time reviewing Ariba's most recent 10Q (from www.freeedgar.com). The reports does not shed light on what the $153 million in deferred revenue represents. Deferred revenue usually represents cash paid in advance for services/licenses that will be delivered in the future - Ariba would recognize the revenue once the services/licenses are delivered. Of course, we know nothing about the arrangements or the contractual agreements that have led Ariba to receiving the deferred revenue. For example we don't know if the revenue is from contracts that customers have the ability to back out of or not. What the report does show, however, is that Ariba is highly reliant on the cash from this deferred revenue to fund ongoing operations (the report comes out and says this pretty openly).
I found three things in Ariba's 10Q that stood out as areas of concern (at least in my view):
1. The company is going to be realizing significant amortization and goodwill expense through March 31, 2003 - this puts the company at risk of not generating any positive net income until that time - here's an excerpt from the report:
"As of June 30, 2000, we had an aggregate of $3.1 billion of goodwill and other intangible assets remaining to be amortized for these assets. The amortization of the remaining goodwill and other intangible assets will result in additional charges to operations through the quarter ending March 31, 2003. We expect to record additional goodwill and other intangible assets in connection with the proposed acquisition of SupplierMarket.com."
2. As mentioned above, Ariba is very reliant on cash generated from deferred revenue to fund their operations - yet the report doesn't really give any details on this deferred revenue (what, if any, contractual obligations relate to it). The report states:
"Net cash provided by operating activities was $87.6 million in the nine months ended June 30, 2000 and $13.7 million in the nine months ended June 30, 1999. Net cash provided by operating activities in the nine months ended June 30, 2000 was primarily attributed to deferred revenue from customer payments that were not recognized as revenue, and, to a lesser extent, by increases in accounts payable, accrued compensation and related liabilities and other accrued liabilities."
3. Ariba seems to be issuing a large amount of warrants on its stock to it's business partners - according to the report the warrants are issued as an incentive to reach specific sales targets. In fact, in 2000 alone, Ariba has issued warrants for 11% of the company's stock. Ariba will realize expenses as these warrants are exercised. Perhaps, it is a general practice to issue warrants to business partners - but 11% of the company seems to be a bit high. Here's the excerpt from the annual report:
"In January 2000, in connection with an alliance with EDS CoNext, Inc., the Company issued warrants to purchase up to approximately 11,600,000 shares (up to 4.8% of the Company's stock outstanding at July 31, 2000) of the Company's common stock, assuming the exercise of such warrants on a net issuance basis at current market values, at various exercise prices based on future prices of our common stock or on predetermined exercise prices."
"In February 2000, in connection with an alliance with Telefonica S.A., the Company issued warrants to purchase up to 4,800,000 shares (up to 2.0% of the Company's stock outstanding at July 31, 2000) of the Company's common stock at various exercise prices based on future prices of our common stock or on predetermined exercise prices."
"In March 2000, in connection with an alliance with International Business Machines Corporation, the Company issued warrants to purchase up to 3,428,572 shares (up to 1.4% of the Company's stock outstanding at July 31, 2000) of the Company's common stock at an exercise price of $87.50."
"In April 2000, in connection with an alliance with Bank of America, the Company issued warrants to purchase up to 6,776,000 shares (up to 2.8% of the Company's stock outstanding at July 31, 2000) of the Company's common stock at an exercise price based on the ten day average of the Company's stock price up to and including the vesting date of when the warrant is earned."
In review of the above, I suppose what I would fear most is if the deferred revenue has been received in exchange for the warrants. I have no idea if this is the case - and I'm only speculating on a possibility here. But I can see such a thing being negotiated - where a large business partner agrees to pay a large amount of money up front for licenses and receives warrants as well. This would amount to "creative financing" in my view - and "buying customers" in effect. But again, I have no idea is this is happening - it's just the large amount of the warrants makes me wonder.
Anyway, per the report, Ariba is not going to be profitable for quite some time - unless they have tremendous profit growth, not until 2003. To me, that's a long time to wait. Keep in mind that none of the excerpts above is from the Risk section of the report, but rather from the notes and Management Discussion.
Insider sales at Ariba appear to be a bit high for a company that has been public for only a year - here are few selling stats (these are from www.insiderselling.com):
Keith Krach, Chairman & CEO, has sold 1.6 million shares at prices ranging from $63 to $190.
Edward Kinsey, CFO, has sold 853,253 shares at prices ranging from $70 to $190.
Robert Desantis, Executive VP, has sold 1.1 million shares at prices ranging from $78 to $245.
David Rome, VP of Marketing, has sold 636,874 shares at prices ranging from $82 to $258.
In short, it seems that nearly every member of the executive staff has made at least about $100 million in stock based compensation during the past 12 months. There's been a tremendous amount of other insider selling as well.
Good luck with the investment - there are too many risks here for my tastes.
-Eric |
