COMMENTARY -- A little clarity would go a long way for Ariba (Nasdaq: ARBA).
Wall Street is flaying the provider of B2B software and services because the company's growth is slowing. No one thinks Ariba is a bad company, but it's not the warp speed engine it was six months ago.
Much of the problem stems from perspective. Ariba posted almost unreal growth numbers until now. Twenty-six percent sequential revenue growth sounds great, but not compared to 67 percent and 102 percent in the September and June quarters, respectively. License growth slowed markedly also, to 30 percent from 85 and 105 percent in the previous two quarters.
No one expected the company's revenue to double every quarter forever. With sales now reach the $200 million per quarter mark, a slowdown was bound to happen.
However, Ariba could do itself a few favors by being more open about what's going on. Several analysts pointed out the company has suddenly stopped disclosing information such as average selling price and the number of new customers added. Executives declined to provide much detail about network services revenue.
"The company will still not disclose what portion of network revenues is plain-old maintenance revenue," notes Kaushik Shridharani of Bear Stearns & Co. "This (maintenance) category of revenue is not, to our eyes, evidence of development of the next phase of the business model."
The company's refusal to provide more revenue details makes people wonder just how lucrative this stage of B2B commerce really is. Some analysts in the past have argued that the real money isn't in merely handling B2B transactions, but instead at the deeper level of supply chain management.
Then there are those pesky term licenses.
Traditional software sales mean selling software license for a set price. You pay the publisher and keep the software forever, end of story. The seller typically recognizes the sale over a few quarters, the idea being that you record the revenue over the product's lifespan.
Under term licenses, you have the right to use the software for a set period -- two to three years, Ariba's case. You pay a little less, but the company comes back when the term expires to hit you up for more money. It's a good model for network-based technology models like B2B commerce software.
But term license revenue recognition makes the picture blurry. Unlike a perpetual license, term license money is all up front. Juices revenue nicely in the short term, but it also makes it harder to predict revenue down the road because everything was paid in one shot.
And analysts don't like that new degree of unpredictability.
"Our inability to accurately analyze the company's growth increases our uneasiness," ABN Amro's Robert Johnson writes in a research note released today.
Add that to the facts of a slowing economy and a richly-valued stock, and it's easy to see why Wall Street has suddenly become so leery of Ariba.
Don't think that Ariba has turned into a bad organization. Quite the opposite, Ariba is a well-run company. But the numbers speak for themselves -- the company is growing slower than before, which isn't what you want to hear for a stock trading at more than 90 times next year's estimated earnings.
Worse, growth has become harder to measure because of Ariba's shift to what amounts to multi-year deals that are paid for up front. There are only so many large companies out there that can benefit from B2B technology; once they're locked into a multi-year deals, where will further revenue come from?
Ariba executives say they're not worried about that. Fine for them, but until Wall Street gets a better inkling of what's going on with Ariba's business, investors have less reason to like the stock at the current level. 22GO>