The Starting Line: Ariba's quest for black ink

The business-to-business software maker is counting on its third CEO this year, former CFO Bob Calderoni, to turn around its sliding sales.

Margaret Kane Former Staff writer, CNET News
Margaret is a former news editor for CNET News, based in the Boston bureau.
Margaret Kane
5 min read
Things haven't exactly looked bright for e-commerce software company Ariba over the past year.

Its declining financial results and revolving door of chief executives have sent the company's stock plunging off a 52-week high of $141.06 to close Thursday at $3.24. Meanwhile, losses are mounting.

Earlier this week, the business-to-business software maker reported a net loss of $224.3 million, or 89 cents per share, for the fourth quarter, including charges for goodwill amortization and restructuring. Excluding the charges, Ariba lost $27.7 million, or 11 cents per share, about two cents better than analysts' expectations.

But while the company is trying to stem the red ink, sales are falling. Revenue slipped a whopping 53 percent from the year ago quarter to $62.6 million. And revenue is expected to continue to decline in the current quarter as software customers scale back on purchasing in the midst of an economic downturn.

All of this lands in the lap of new CEO Bob Calderoni, who took over the top spot from Ariba founder Keith Krach. Krach had been serving as interim CEO after the departure of Larry Mueller, who left the job in July, a mere four months after being named the position.

Calderoni had been serving as Ariba's chief financial officer and in that role oversaw much of the work the company was doing to clean up its financial house. CNET News.com talked to Calderoni this week about his plans for the company.

Q: You beat expectations for the fourth quarter. What areas did particularly well?
A: The first thing is that we've clearly refocused the company on what we call "spend management," which is aimed at helping chief procurement officers and (chief financial officers) save money, and the feedback has been very positive overall. In this economy what company out there doesn't want to save money? We just announced a new product, Ariba Enterprise Sourcing. It shipped only in the last few days of the quarter, and it's already had a number of key wins. EMC would be a good example of that.

There's no doubt the economy remains challenging, but we're very encouraged that when customers do make decisions, we can compete effectively against big ERP (enterprise resource planning) players.

You recently talked about how important cost controls are internally. What are you doing now to make that happen?
Well, we're not just diagnosing the problem now, we're already taking actions. We've already taken actions by the end of September that will drive (our) expense line to $60 million to $65 million, which is in line with the revenue we just reported. While I certainly don't want to predict profitability in an environment like this, you can see...it's not a far-reaching goal but a definite priority for us. These are all actions that are behind us.

So when do you see that happening? What is your breakeven point?
We continue to expect the near-term market for software to be challenging. With that uncertainty it's prudent to expect some further deterioration (in revenue). (We expect to report) $50 million to $55 million in revenue (in the first quarter), but again, we've already taken actions to position expenses in the $60 million to $65 million range. While that's not quite at breakeven, the loss has narrowed. We're on the cusp of breakeven and profitability is not a far-reaching goal.

If we see a stable economy, we can be profitable in the second half of next year, and if we get a little help, it can be even sooner.

Sales are still off sequentially. How will you bring that number back up?
Our focus is entirely external. We dealt with internal issues earlier this year and this quarter. That's now behind us and our guns are pointed externally. Our focus is all about dominating the spend-management category aimed at helping customers save money. ("Spend management" is the company's new marketing strategy that involves pitching an entire line of products that tie together.) It's a three-step process. It's not just an e-procurement (purchasing software) model. That's an IT approach. We're a business approach. I've been a CFO, I understand what business professionals need. They need help ensuring that when they do find savings, they can keep those savings year in, year out.

We believe there's a tremendous opportunity out there, and that's the strategy. We've got the right products, we've got the right strategy. We're not going to let a short-term economic challenge beat us.

But the "spend management" idea focuses more on a package of applications than on individual components. Isn't that more difficult to sell in today's economic environment, when companies are cutting back on IT spending?
Many companies that are potential customers of ours are faced with a lot of uncertainty in their own business. Until they find some stability in their own business, they're reluctant to (spend). But part of their plans for next year recognize that (the) economy will be tough and they need to reduce costs in their own business. They can resort to some thoughtful prioritization of their own spending. It's reasonable to expect some modest improvement in customers willing to invest in cost reduction initiatives.

You're the third CEO this year. How have the management changes affected the company?
The management team today is unified and very focused on the objectives at hand. Rather than talking to strategies of the past I'd rather focus on the strategies we've worked on in the last 90 days. One that myself and senior individuals in the company are confident (about) is a strategy focused on real companies and real customers.

The feedback I get from employees, partners and customers is very positive. It's resonating very well.

What's your primary goal here? You come from a finance background, which should be helpful in getting Ariba's financial house in order, but how does that help map out long-term strategy?
That's a question I've gotten quite often in the last week. As a CFO, everyone thinks my objective is to cut costs. But that's all behind us. We're all focused on the future. I believe my background is perfect for the space we need. I was a customer, I know what CFOs and their procurement officers need.

The reaction I get is, "It's refreshing to talk to somebody who knows our business and talks to me about real technology that solves our problems and isn't just focusing on buzzwords and trying to push a technology on us." The reaction I get is, "It's about time."