Downgrades overshadow Ariba''s 2Q

Ariba (Nasdaq: ARBA) fell Friday despite an upbeat quarterly report; many analysts lowered ratings and said ambiguous accounting may have hid a slow down in revenue growth.

Shares in the vendor of business-to-business marketplace software and services were off 7 percent, or 3.19 to 40.19 ahead of Friday's opening bell.

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,which is far from shabby, but well below the 70 to 100 percent gains investors have come to expect from the company.

Ambiguous accounting

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

"While Ariba turned in a solid quarter we are concerned with 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 which should alert investors are a 94 percent increase in receivables, while revenue increased 26 percent sequentially, he noted. "While this may be an easily explained accounting issue, it creates uncertainty and is a contentious issue with investors scrutinizing software stocks."

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 result in increased short-term earnings upside.

Deteriorating growth?

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

"We believe that several metrics in the 1Q results point to a possible loss of momentum. Additionally, ARBA 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 firm's report.

Robinson-Humphrey saw possible weakness in terms of customer adds, average sales price, more aggressive revenue recognition, flat consulting revenue, network services revenue, sales headcount growth, rising DSOs, rising allowances and a likely deterioration in deferred revenue growth.

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

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 Intl Melissa Eisenstat was more upbeat, and maintined a "strong buy" rating, but also questioned whether the company is beginning to lose some momentum, based on the fact that 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, an praised strong operating margins and robust earnings per share.

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