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Ariba tumbles on analyst skepticism

Shares of the e-commerce software maker fall nearly 20 percent despite an upbeat quarterly report, as many analysts lower ratings and warn of a slowdown in revenue growth.

Ariba fell nearly 20 percent Friday despite an upbeat quarterly report, as many analysts lowered ratings and said ambiguous accounting may have hidden a slowdown in revenue growth.

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Ariba confident despite sinking stock
Keith Krach, Ariba CEO
Shares in the e-commerce software maker ended the regular trading session Friday off $8.19 to $35.19 on the Nasdaq.

Ariba beat consensus estimates with $170 million in revenues and robust earnings of 5 cents a share, and raised estimates in its second-quarter report after Thursday's bell. Revenue growth for the quarter was 26 percent, far from shabby but well below the 70 percent to 100 percent gains investors have come to expect from the Mountain View, Calif., company.

"The company's transition to term licenses has created ambiguity in their true growth rate," said ABN AMRO analyst Robert M. Johnson, who reduced his rating to "add" from "buy." "The transition has the effect of artificially increasing reported revenue growth."

Although Ariba turned in a solid quarter, Johnson said, there was also a perceived slowdown in sequential revenue growth when deferred revenue is taken into account. "We believe investors may have this perception as well," he added.

Figures that should alert investors, he said, are a 94 percent increase in receivables, while revenue increased 26 percent sequentially. "While this may be an easily explained accounting issue, it creates uncertainty and is a contentious issue with investors scrutinizing software stocks," he said.

Johnson also decreased his 12-month price target to $52. "We believe short-term catalysts are limited," he added.

Johnson noted that the company's long-term prospects are still strong and raised estimates despite the downgrade to reflect the company's transition to term licenses, which may bode well in the short term.

Robinson-Humphrey analyst Chris Rowen also downgraded the stock--to "neutral" from "market outperform"--while raising estimates. In a research note, the company questioned Ariba's silence on some key metrics and "deteriorating fundamentals."

"We believe that several metrics in the (first quarter) results point to a possible loss of momentum. Additionally, (Ariba) would not divulge several metrics that they have given out in past quarters, creating more doubt about the health of the company," according to the report.

Robinson-Humphrey saw possible weakness in a range of areas, including customer adds, average sales price, consulting and network services revenues, sales headcount growth and rising allowances.

Deutsche Bank Alex Brown analyst James Moore also lowered his rating--to "buy" from "strong buy"--citing concerns about decelerating growth.

He said there were signs of decelerating growth in the core procurement business, which could be exacerbated by the current shaky macroeconomic outlook. He also noted that the shift to term licenses and upfront revenue recognition lessens Ariba's quarter-to-quarter revenue visibility, which "had been one of the appealing aspects of its business model."

CIBC Oppenheimer International's Melissa Eisenstat was more upbeat. She maintained a "strong buy" rating, but also questioned whether the company is beginning to lose momentum, because this was not a "blow-out" quarter as preceding quarters have been.

"Although e-commerce has been 'priority one' for business over the last two years, it is not immune to economic conditions. We believe that e-commerce will remain a key priority, but steps will be more measured in the near term," Eisenstat wrote.

Bear Stearns analyst Kaushik Shridharani maintained his "buy" rating and $80 price target for August 2001. He raised revenue and earnings estimates and praised strong operating margins and robust earnings per share.

But, he conceded, "the results also verified some of our concerns regarding the slowdown of business model development."