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THE DAY AHEAD: Ariba leap frogs a few quarters on path to profits

Ariba is showing partnerships pay. The company's third quarter results fast-forwarded the company three quarters on its path to profitability.

In the first quarter where it could benefit from its alliance with IBM (NYSE: IBM) and i2 Technologies (Nasdaq: ITWO), the company reported a smaller than expected loss and nearly doubled Wall Street's revenue targets.

Ariba lost 5 cents a share, excluding charges, on sales of $80.7 million in its fiscal third quarter. Analysts were expecting a loss of 8 cents a share on sales of about $49 million.

On a conference call with analysts, CEO Keith Krach said the company is very comfortable with First Call Corp. consensus estimates calling for break even in the September quarter of 2001.

He should be. Ariba wasn't supposed to perform this well until the March quarter of 2001. Krach said Ariba is investing the upside in the business and didn't push up the company's profit target. But you can bet analysts will push the profit goal up a bit. One analyst asked if Ariba could be profitable in the first quarter of 2001, prompting Krach's conservative answer.

Accounting for a $30 million revenue upside surprise isn't easy, and Ariba officials didn't make it any easier. Although analysts tried to pin the revenue growth on the IBM and i2 alliance, executives didn't credit the alliance directly.

Krach said he couldn't quantify direct customer wins related to the alliance with IBM and i2, but did add that the venture is "a great success that is gaining traction." In the quarter, the alliance brought in exchange deals including, e2Open, an industry consortium including Hitachi, IBM, LG Electronics, Panasonic, Nortel, Seagate, Solectron and Toshiba; and MetalExchange involving Alcoa, Reynolds, Kaiser and others.

"And many more are coming," said Krach, who added that the Ariba-i2-IBM sales teams are working well together.

Ariba execs said the company is gaining momentum based on customer raves and its ability to implement e-commerce marketplaces quickly. Indeed, it appears partnerships like the IBM-i2 venture are paying off in terms of credibility and installations.

Get used to it. Ariba indicated that it expects its recently announced partnerships to pay off in the revenue department. Ariba recently announced alliances with Arthur Andersen, Descartes, VeriSign, American Express, Bank of America, MatrixOne, Luminant Worldwide Corp.

The theory behind all these partnerships is clear: Have the integrators push a lot of Ariba software. This quarter's results are likely to be just the beginning for Ariba. Second quarter sales were up 101 percent sequentially, and Ariba's in-house sales force accounts for about 90 percent of sales. As indirect sales through partners like IBM, i2 and Andersen gain traction, the top line growth should be impressive.

"We're just now beginning to see the effectiveness of the indirect channel," said Krach. "We believe there's tremendous upside."

Tough act for Commerce One

Ariba's results make things very interesting for Commerce One (Nasdaq: CMRC). These two B2B companies are closely linked together in terms of perception. Commerce One should trade well based on the optimism surrounding Ariba.

The big question is whether Commerce One can deliver Ariba's big top line growth. As for Commerce One's revenue target, it's about $48 million, said analysts.

Will Commerce One top revenue estimates by about $30 million? We'll find out next Tuesday. One thing is for sure -- Commerce One has a tough act to follow.TDAIN