Could you (Ariba) be another MICROSOFT (MSFT), as far as investors are concerned? [Krach, Ariba CEO] "Absolutely"
Zero In
Issue #85
Ariba
Keith J. Krach,
Co-Founder, Chairman &
CEO
Interviewed by George S. Mack
Business-to-business is big business. When a
resort hotel, for example, buys napkins, it may
procure a million at a time. When a government
agency buys cleaning supplies or food, it's by the
carload. When a major corporation buys paper and
toner – well, you get the idea. It all adds up to
trillions of dollars. As soon as B2B e-commerce
software company ARIBA (ARBA) got its initial start-up funding back in
September 1996, the first thing the founders did, even before writing a single
line of code, was to begin meeting with procurement people from Fortune 500
companies. ARIBA's top brass asked them two things: First, how were they
making purchases at that time; and second, if they could wave a magic wand,
how would they like to buy operating resource goods and services for their
companies in the future? Today, ARIBA puts the very largest buyers and
sellers together in electronic marketplaces on the Internet, and the company
is now expected to have $1.32 billion in revenue fiscal 2002, which ends in
Sept. 2002. In the year to date, ARIBA shares, which closed at $132.88 on
Nov. 3, are up 40% in the year-to-date, while the Nasdaq Composite is down
15% for the same period.
[THE INTERNET ANALYST – GEORGE S. MACK] Keith, could you give me
the briefest description of what ARIBA does?
[KEITH J. KRACH] Absolutely. We provide the platform and network that
connects businesses to different businesses and allows them to conduct
commerce over the Internet, and it brings unprecedented value to them.
[GSM] What are some of your main products?
[KJK] We have a marketplace product, Ariba Marketplace, a buyer-side
product, Ariba Buyer, a dynamic-pricing product, Ariba Commerce Services
Network, and a trading product, Ariba Dynamic Trade.
[GSM] Tell me about the dynamic-trading product.
[KJK] That's auctioning – forward and reverse auctioning – over the Internet.
It's like an EBAY (EBAY) on steroids.
[GSM] You obviously have a license and maintenance revenue model, but you
also receive a cut from transactions conducted by buyers and sellers. Is that
correct?
[KJK] There are two forms of
that: One is the percentage of
revenue on the marketplaces,
and the other is percentage of
the commerce services on the
network.
[GSM] What about your
subscription model?
[KJK] For a number of
products, we have a
subscription-based model, but
there's also a subscription to
the network. It's a fee for
hooking up to the network.
[GSM] I spoke with Ed
Kinsey, your CFO, at the
Banc of America Growth
Conference in San Francisco,
and he was quite excited
about your alliances with I2
(ITWO) and IBM (IBM). You are now training 1,500 IBM employees. Is this a
revenue-sharing arrangement?
[KJK] With IBM, it's a multi-dimensional relationship. IBM is reselling our
products around the world – that's probably what Ed was referring to. And we
share some revenue along those lines. IBM also has a go-to-market strategy
with its hardware and middleware product. Also, its global services unit is a
very strong partner for us for many of our customers. The other is that IBM
has standardized on ARIBA for its B2B e-commerce platform for internal use.
[GSM] There's been a little bit of concern on the Street about your partner I2,
which excluded you from a SIEMENS (SMAWY) contract that will include
your other alliance partner IBM. That deal will also include your direct
competitor COMMERCE ONE (CMRC). Did this disappoint you? What's going
on here?
[KJK] There's so much opportunity out there that it's incredible. But, would we
have liked to have been part of the SIEMENS deal? Sure. However, there are
so many big deals. For example, DEERE (DE) chose the ARIBA B2B
e-commerce platform to help transform its purchasing processes and to power
other e-commerce efforts. Also, we've assisted with Procuron, a newly created
marketplace bringing together the five largest banks in Canada. So there are
all kinds of big deals out there.
[GSM] A couple of the big ERPs [enterprise resource planning software
companies] are competing with you – specifically ORACLE (ORCL) and SAP
(SAP). I was wondering if you might consider PEOPLESOFT (PSFT) as a
possible new alliance. It could be a natural vendor and integrator of your
products.
[KJK] We certainly have a very strong integration to PEOPLESOFT's
software. If you look at our customers, many of them have standardized on
PEOPLESOFT financial and HR [human resources] products – companies
like AMERICAN EXPRESS (AXP) or American Honda Motor, a division of
HONDA MOTOR (HMC).
[GSM] Are there any new alliance partners of the caliber of IBM or I2?
[KJK] We just recently announced a major multi-dimensional alliance with
SOFTBANK (SFTBF) in Japan. As you know, SOFTBANK is the No. 1
technology company in Japan. It's a four-part alliance. First, SOFTBANK will
use our e-commerce platform for all of its internal operations. Second,
SOFTBANK will build a horizontal marketplace for its subsidiary companies.
Third, it will build 10 vertical markets in the construction field. And fourth,
SOFTBANK will develop commerce services for our network in Japan. The
company also invested $40 million in ARIBA Japan.
[GSM] I understand that 80% to 85% of your revenue came from the United
States in the third quarter. It appears that Asia and Europe could present
unbelievable opportunities for you. How long will it be before you begin to
exploit those markets?
[KJK] Our business in Europe, Asia, and Latin and South America is growing
at a tremendous clip. I think this quarter growth was at 20%. If you look at
some of our international customers – NEC (NIPNY) and SONY (SNE) in
Japan – they have standardized on ARIBA. Look at VOLKSWAGEN (VLKAY)
and BMW (BAMXF) in Germany; Swissair [part of SAIRGROUP (SAIRF)] and
HOLDERBANK (HFGCY) in Switzerland; ABN AMRO HOLDING (ABN),
PHILIPS ELECTRONICS (PHG) and ING GROUP (ING) in the Netherlands;
and in the United Kingdom, LLOYDS TSB GROUP (LLOY). So it's really
beginning to ramp.
[GSM] I'm looking at your deferred revenue, which was up 30% from the
previous quarter, as opposed to the previous quarter when deferred revenue
rose 82%. You added $46 million in deferreds this quarter, vs. $68 million last
quarter. Is it possible that your phenomenal growth could be slowing down just
a bit?
[KJK] I think we will continue to see very strong growth. We're very pleased
with moving our deferred revenue from $154 million to roughly $200 million. It
was very close to what we were expecting.
[GSM] I understand that only about a third of your 435-plus customers are
using more than one of your products. When do you expect to aggressively
cross-sell these customers?
[KJK] That's going on right now. That's one of the beauties of our business
model. A lot of the e-procurement customers are buying marketplaces, and a
lot of the marketplaces are buying e-procurement. For example, the big
Transora deal we won is the first global industry-led marketplace in the
consumer products industry. It was formed by more than 50 of the world's
leading consumer products companies, and its investors represent a
combined purchasing power of $500 billion – more than half of the global
consumer products industry. They came in and bought from an e-procurement
standpoint.
[GSM] I was looking at ARIBA's one-year total return of 218%, as of Oct. 27,
and you have far outpaced your direct competitors – COMMERCE ONE, up
129% for the same period, PURCHASEPRO.COM (PPRO), up 98%, and
VERTICALNET (VERT), down 3%. What sets you apart from them?
[KJK] I don't think there's any doubt that the acceleration we're seeing in
market share is the result of the success of our early customers and the
quantifiable benefits they've received from standardizing on our e-commerce
platform.
[GSM] How big is your addressable market?
[KJK] That's a tough question. The industry analysts say that by 2005, $7
trillion worth of transactions will be conducted over the Internet. I think it's the
biggest market the world has ever seen.
[GSM] How big do you think you can get?
[KJK] I think very, very big. Our objective is to clearly be the leader.
[GSM] Could you be another MICROSOFT (MSFT), as far as investors are
concerned?
[KJK] Absolutely. |
