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To: GST who wrote (117389)	2/10/2001 11:34:17 PM
From: Glenn D. Rudolph	Read Replies (1) \| Respond to of 164684

Your preference for ARBA is hard to understand. "I understand their business very well and I will take ARBA over I2 any day." Why would you prefer a poorly positioned firm scrambling to move from the low rent district over the "leader"? Is it a valuation issue? Are you approaching ARBA as a turnaround play? Not a value play at all. I believe they are well positioned due to the size of their current network. I2 has a smaller network by far and I admit to them having created better SCM software. I do believe Ariba will do far better than I2 when or if Ariba obtains or creates decent SCM. The size of the network is more important to me than the current state of the software itself. I believe Ariba markets their products better. Another way to play this would be to own a little of both and that is not a bad idea. I am not debating you or disagreeing that I2 is better positioned in SCM nor am I of the belief SCM is not that important. It is very important. It would not hurt if I researched I2 further to see how much their network has grown. The last time I looked they were way behind Ariba in that area. This concept is similar to content management when comapring let's say VIGN to ATG. I would go with ATG over VIGN due to their integrate java. Glenn

To: GST who wrote (117389)	2/11/2001 1:35:04 AM
From: Glenn D. Rudolph	Respond to of 164684

Big Company, Bigger Market… Summary Ariba entered a new stage in its evolution as an e-procurement and B2B infrastructure provider, posting a dramatic 1Q 01 earnings breakout on better than expected revenue performance. There were a few blemishes in the quarter, but at these price levels we believe these results are good enough to begin to turn the stock. Ariba delivered 26% sequential revenue growth versus our 13% expectations and bested our $0.02 EPS estimate by $0.03, delivering $0.05 on 10.6% operating margin. This margin upside significantly changes the earnings power from our Ariba model, and we are raising our FY 2001 revenue estimate from $756 million to $788 million and EPS from $0.18 to $0.26. Given the pull back in Ariba with the overall NASDAQ sell-off, investors will now find ARBA trading at more palatable levels relative to established enterprise and e-commerce software vendors. ARBA now trades at a 1.8x PEG on CY 01 EPS and a still-rich 14x revenue. However, we currently find ORCL(ORCL; C-2-1-9; $33.25) trading at a 2.4x PEG and 16x revenue and ITWO(ITWO; D-2-1-9; $50.75) at 3.3x PEG and 15x revenue multiple. Given the earnings momentum and continued upside to the Ariba model, we believe ARBA could gain 25% or more from current levels and maintain our BUY. Our new price objective is $55, based on a conservative 1.2x PEG on CY02 EPS estimates of $0.60. The company addressed a few concerns in the quarterly results. Accounts receivable DSO increased from an unsustainable 41 days in 4Q 00 to 63 days in 1Q 01, primarily due to significant expansion in Europe and Asia deals which carry longer payment terms. Deferred revenue grew 18% sequentially, strong but hindered somewhat by an increasing mix of "term licensing", which is renewable over a 2-3 year period, recognized up-front and reduces deferred balances. We believe these trends are consistent with a maturing business mix and expect the company to sustain sequential growth well above our current model. Management commented that demand remains strong for its e-procurement solutions heading into CY01, with 20% of North American markets penetrated and much lower penetration in Europe and Asia, where the company saw a significant expansion in business opportunities. 1QFY01 Financial Highlights Demand continued to be strong for Ariba e-commerce products and services as the company posted an operating profit of $0.05 on healthy revenue of $170.2 million (+625%) beating Merrill Lynch estimates of $0.02 and $151.8 million, respectively. The license/service mix shifted more in favor of licenses 76/24 as the company begins to outsource many of its services to partners. License revenues climbed to $128.9 million (+717%) as and network revenues represented about $26 million (+694%) Ariba signed up “well over” 100 new customers globally including American Airlines, Best Buy and Dutch Railways and live customers increased to in excess of 200 customers, up from 150 in the prior quarter. International sales are growing as a percentage of sales and contributed an all time high of 30% to the top line, up from 20% last quarter. While demand is strong in all geographic regions, Japan continues to outperform driven by Ariba’s joint venture with Softbank Corp. Ariba exercised expense control during the quarter by lowering S&M sequentially and keeping R&D and G&A costs relatively consistent on a percentage basis. Operating margins were positive for the first time and improved to 10.6%, better than our 0.7% estimate. On the balance sheet net cash rose $40 million sequentially to $435 million. Accounts receivables grew to $120 million due to the international mix, leading to AR DSOs of 63 days, but still within the company’s desired range. Deferred revenues grew 18% to $235 million. Outlook For the first time since its IPO, Ariba didn’t obliterate consensus estimates. Ironically, we believe Ariba has never looked stronger. The company continues to gain market share as it scales to address a market that is clamoring for its product, and remains vastly under-penetrated. Ariba is in the virtuous cycle of gaining credibility as a profitable company, thereby enhancing its appeal to a wider audience of F2000 consumers fueling continued revenue growth. While our model for FY ‘01 reflects better than 180% revenue growth off a hefty base, we feel that this number could be conservative, driving continued earnings upside.