Ariba has foggy view of future

The vendor of software for business-to-business commerce also canceled its acquisition of Agile Software and plans to lay off about one-third of its work force.

"It's unclear to us when the economy will change and corporate decisions will open up again," Ariba CEO Keith Krach said Monday during a conference call with analysts. "We also realize that today's results are unacceptable, and I personally take responsibility for that."

Ariba on Monday said it expects to report a fiscal second-quarter loss of 20 cents per share, excluding noncash charges, on revenue of $90 million. First Call consensus had predicted a profit of 5 cents per share on revenue of $180.3 million for Ariba's second quarter ended March 31.

Shares of Ariba traded at $5.50 in after-hours activity on the Island ECN after the conference call. Ariba fell $1.38 to $6.53 in Monday's regular trading ahead of the news.

The company's second-quarter revenue represents a 47 percent decline from fiscal first-quarter revenue of $170.2 million.

Joining the club
Earlier Monday, i2 Technologies announced lower earnings expectations and plans to cut 10 percent of its staff. Other enterprise software companies, such as Oracle, have recently reported lower-than-forecast earnings results.

Because of those precedents, many Wall Street analysts anticipated that Ariba would fall short of estimates.

"It wasn't a matter of whether they would miss the quarter, but how bad the miss would be," said John Ederer, analyst with Pacific Growth Equities. "Even so, I think the magnitude of this is surprising."

Ariba plans to record a one-time charge of $15 million to $20 million in the third quarter, related to the layoff about 700 people, or about a third of the work force. Most of those job cuts will come this month, executives said.

The company also will record charges of $50 million to $75 million to write off some investments and real estate commitments. About 33 percent to 40 percent of those write-offs will be reflected as noncash charges related to investments, while the remainder will be recorded as cash charges, Chief Financial Officer Robert Calderoni told analysts.

"We will be implementing actions to adjust the business accordingly," Calderoni said.

Ariba canceled its stock-swap acquisition of Agile because of poor market conditions, the companies said. Since that deal was announced in late January, Ariba's stock price has fallen more than 80 percent.

Customers noncommittal
Like its peers, Ariba blamed much of its shortfall on the U.S. economic slowdown. And like Oracle and others, Ariba saw many of its customers put off buying decisions at the last minute. Sellers of software for corporations typically don't close most of their sales until the last few weeks of their fiscal quarters.

"The issue, as we say, is strictly a reluctance to make decisions at the CEO/CFO level," said Larry Mueller, Ariba's president and chief operating officer. "We could not get decisions made, and therefore key deals in our pipeline moved from this quarter to next quarter."

Not all of Ariba's shortfall was purely related to worries about the economy. Although Ariba's core business of software for corporate purchases, online auctions, finding suppliers and automating certain business processes is still growing, the company's network revenue--such as transaction fees from online marketplaces--was a huge disappointment to the company.

Ariba, which originally expected industry buying consortiums and other business-to-business exchanges to provide a steady source of revenue, no longer sees much in the business of powering Internet marketplaces.

"The exchange business...has seen a dramatic falloff, and we don't think there'll be a recovery in marketplace revenues," Krach said.

By telling Wall Street to essentially discount the marketplace business, Ariba loses some of the luster that attracted investors last year, said Ederer, who has a "neutral" rating on the stock. "That's a fundamental change there," he said.

The company is suffering from the widely reported collapse of many industry-trading exchanges online. Many businesses that were designed to sell materials and parts for particular sectors such as steel, electrical utilities and chemicals have not lived up to their promise, Ederer said.

"A lot of those have just fallen by the wayside," he said. "They built it and nobody came."

The root of the matter
Ariba now has to rely more than ever on its core software business. But canceling the Agile acquisition puts a dent in Ariba's plan to extend its software offerings into supply-chain management, a field that typically commands higher margins than Ariba's other software businesses.

"I saw some demos they showed recently, and a lot of it was based on Agile," Ederer said. "That was going to be a key product line for them, and now it's gone."

First Call consensus predicts revenue of $130.6 million over the next four quarters for Agile as an independent company, and getting cross-promotional opportunities and additional resources by joining Ariba might have boosted that figure more, Ederer said.

Ariba ended the second quarter with roughly $400 million in cash, executives said. But the company joined its peers in lamenting their inability to accurately predict earnings in revenue in the near future.

"It's difficult to give any guidance going forward at this time," said Calderoni, adding that the company's original forecast for 2001 was based on last year's demand. "We will obviously have to reassess our expectations."

A cloudy future combined with a disappointing present makes it difficult to have confidence in Ariba, Ederer said.

"I didn't feel on the conference call that they gave us much of a silver lining," he said. "Things look pretty bleak."