Transcript of
Ariba, Inc. (ARBA)
Second
Quarter Fiscal Year 2012 Conference Call
April 26, 2012
Robert M. Calderoni,
Chairman and Chief Executive Officer
Ahmed Rubaie, Chief
Financial Officer
John Duncan, Vice
President of Investor Relations
Operator
Greetings ladies and
gentlemen and welcome to the * Conference Call. At this time, all participants
are on a listen-only mode. A brief question and answer session will follow the
formal presentation. If anyone should require operator assistance during the
conference, please press *0 on your telephone keypad. As a reminder, this
conference is being recorded.
Greetings
and welcome to the Ariba Second Quarter Fiscal Year 2012 Earnings Conference
Call. At this time, all participants are on a listen-only mode. A brief
question-and-answer session will follow the formal presentation. If anyone
should require operator assistance during the conference, please press *0 on
your telephone keypad. As a reminder, this conference is being recorded. It
is now my pleasure to introduce your host, John Duncan, Vice President of
Investor Relations for Ariba. Thank you, Mr. Duncan, you may begin.
John Duncan – Ariba,
Inc. – Vice President of Investor Relations
Good
afternoon and welcome, everyone, to Ariba’s conference call to discuss results
for the second quarter of fiscal year 2012. In today’s call, we’ll make
reference to supplemental presentation slides with our prepared remarks. To
access these slides, please log on to Investor Relations section at our website
at www.ariba.com.
Our
speakers for the call today are Bob Calderoni, our Chairman and Chief Executive
Officer; and Ahmed Rubaie, our Chief Financial Officer.
For
those on the call accessing the supplement presentations, please now advance to
slide 2.
Before
we begin, I’ll read the Safe Harbor statement. Statements that may be made on
this call and the supplemental slides that are not historical facts may be
forward-looking statements, including statements regarding the company’s or
management’s intentions, hopes, beliefs, plans, expectations, or strategies for
the future. These statements are subject to various risks and uncertainties
and actual results could differ materially from the company’s current
expectations. These risks and uncertainties are discussed in the company’s SEC
filings, including our most recent Form 10-Q filed on February 7, 2012.
During
the course of this call, we will reference historical non-GAAP financial
measures. The management reviews non-GAAP financial information in evaluating
Ariba’s historical and projected financial performance and believes that it may
assist investors in assessing its ongoing operations. The presentation of this
additional information is not meant to be considered in isolation or as a
substitute for, or superior to measures of financial performance prepared in
accordance with GAAP. For a reconciliation of historical non-GAAP to GAAP
financial measures, please see the earnings press release and supplemental
analysis on the Investor Relations section of our website at www.ariba.com or our Form 8-K filed this
afternoon.
In
addition, we will reference certain forward-looking non-GAAP financial
information, including fiscal year 2012 revenues, expenses and net income. We’re
unable to reconcile this forward-looking non-GAAP financial information to
corresponding forward-looking GAAP measures because we are unable to estimate
without unreasonable efforts certain forward-looking GAAP revenue expense and
other income items.
At
this time, I would like to turn the call over to Ahmed Rubaie to review the
financial highlights for the quarter.
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
Thanks,
John. Good afternoon, everyone, and thank you for joining us today to review
Ariba’s second quarter results.
Ariba
delivered another strong quarter. We were above the top end of our guidance on
revenue, primarily due to the continued rapid growth of our network revenue.
This is not only the fastest growing component of our business. It is now also
the largest contributor to our highly profitable recurring subscription
software revenue.
Our
revenue outperformance combined with the inherent leverage of our network
business and focus on scaling our business efficiently, as balanced with
investments for tomorrow’s growth, contributed to non-GAAP EPS and also
exceeded the high end of our guidance. We are very pleased with the trajectory
of our business and, accordingly, we are raising our revenue EPS and cash flow
guidance for the full year.
Now,
let me walk you through the highlights for the second quarter. Please turn to slide
3. Our annualized subscription software backlog increased to $220 million, up
20% year over year. Our trailing 12-month network volume rose to approximately
$319 million, up 25% year over year organically. In tandem, we continued to
increase participation and our chargeable relationships rose to approximately 98,300
or 18% year-over-year organic growth.
Please
turn to Slide 4. Our highly profitable recurring subscription software revenue
was $89.2 million for the quarter. It exceeded our guidance and is up 32% year
over year and up 21% organically at constant currency. As I mentioned a moment
ago, the driver of our subscription revenue growth is our network revenue,
which showed continued strength at $45.4 million in the quarter, up 59% year over
year and 31% organically at constant currency. We were very pleased with the
continued growth in the network transactions across the globe. Renewal rate
continue to be solid. Network at approximately 95% and other applications at
approximately 90%. This is an indication of business value that we are
delivering to our customers.
Onto
operating cash flow and the old adage that cash is king. We are pleased to
have set a record in the March quarter where we generated $44.4 million of
operating cash flow before lease loss, which is up significantly by
approximately $50 million or approximately 50% from the same quarter last
year. Including lease loss of $5.7 million, Q2 net cash flow was $38.7
million. Remember that the lease loss impact from the legacy Sunnyvale campus
will end next January.
Now,
let me turn to more specific financial results for the March quarter. Please
turn to slide 6. Total revenue increased 21% year over year to $131.5 million
for the second quarter, above our guidance range of $128.5 million plus or
minus $2 million. Subscription and maintenance revenue was $102.1 million,
exceeding our guidance of $99 million plus or minus $2 million. Subscription
Software revenue was $89.2 million, also exceeding our guidance of $86.5
million plus or minus $2 million and, as mentioned a moment ago, up 32% year over
year and up 21% organically at constant currency. Maintenance revenue was
$12.9 million in the quarter, above our guidance of $12.5 million. Services
and other revenue was $29.4 million consistent with our guidance of $29.5
million plus or minus $1 million.
Turning
to expenses. Total operating expenses on a GAAP basis including cost of
revenue were $127.3 million. Included in these GAAP results were $18 million
for stock-based compensation and a $4.8 million charge for amortization of
intangible assets. Excluding these items, non-GAAP operating expenses were
$104.5 million for the quarter, resulting in non-GAAP operating income of $27
million. This represents a 48% year-over-year growth in non-GAAP operating
income and an operating margin of approximately 21%, slightly above our 19% to
20% target for the current year. This demonstrates the inherent leverage in
our business model, which I continue to highlight for you. Going forward, we
will continue to balance margin expansion with investments in multiple parts of
our business to drive long-term growth with a current focus on investments
related to technology and innovation.
GAAP
net income for the second quarter for continuing operations was $1.8 million or
$0.02 per share. On a non-GAAP basis, we had net income of $24.6 million or
$0.25 per share coming in above the high end of our EPS range of $0.22 plus or
minus $0.01 and up 34% year over year.
Moving
on to the balance sheet. Deferred revenue was in line with expectations at
$142.6 million. DSO was 25 days. Our cash balance increased to $262.1
million, up from $223 million in the prior quarter reflecting the strong
operating cash flow I mentioned earlier and is now $2.66 per share. Eighteen
months ago, we had $252 million in the bank. We sold a small non-core
business, bought two core growth network businesses, handsomely grew the
business, built out a new and more fitting facility for our engineers in
California ahead of the lease expiration next January, and we have now put all
that money back in the bank, added another $10 million on top of it, and we
will keep going.
Let’s
now look at our Ariba’s outlook for fiscal year 2012. Please go to slide 7.
As mentioned earlier and based on the strength of our second quarter and our
positive outlook for the rest of the year, we are raising our network and total
revenue guidance by $5 million, EPS guidance by $0.04, and cash flow guidance
by $2 million for the full year. These raises are after incorporating
approximately $6 million of year-over-year currency headwinds that primarily
impact network revenue. We now expect total revenue of approximately $530
million plus or minus $5 million, up from our previous expectation of $525
million plus or minus $5 million.
We
expect Subscription Software revenue to be approximately $366 million plus or
minus $4 million or 33% year-over-year growth. This is up from our original
guidance of $361 million plus or minus $4 million or 31% growth. This uplift
in our Subscription Software guidance, after incorporating $6 million of
currency headwinds, now represents approximately 22% constant currency organic
growth, up from our previous guidance of 20% in January and 19% in October. Within
this, we expect our network revenue to be approximately 31% constant currency
organic growth, up from our previous guidance of 27% in January and 24% in
October.
We
still expect maintenance revenue to be approximately $49 million and services
and other revenue to be approximately $115 million plus or minus $5 million.
On
services, and as we have said in the past, we expect the underlying quarterly
run rate to be between $27 million to $30 million and, of course, it will
continue to be less predictable.
Given
the revenue outperformance, we are also raising our non-GAAP EPS guidance for
the full fiscal year to a range of $0.98 plus or minus $0.02, which is up $0.04
from our January guidance of $0.94 plus or minus $0.02, and $0.06 from our
October guidance of $0.92 plus or minus $0.02. This is based on approximately
99 million diluted shares outstanding.
We
reiterate our prior commitment and continue to expect operating margin
expansion to be approximately 20% for the full year. This includes investments
across multiple areas of our business to drive long-term growth and a current
focus on technology and innovation. We are also raising our operating cash
flow before lease loss guidance by $2 million to $110 million, representing an
operating cash flow margin of approximately 21%.
Turning
to Q3, specifically, we expect the following: Total revenue in the range of
$135 million plus or minus $2 million, subscription and maintenance revenue of
approximately $106.5 million plus or minus $2 million including roughly $94.5
million plus or minus $2 million for Subscription Software revenue, and
approximately $12 million for maintenance revenue. We expect services and
other revenue of approximately $28.5 million plus or minus $2 million. Note
that our Q3 revenue guidance for Subscription Software incorporates
approximately $2 million currency headwinds year over year based on today’s
rates. Again, most of the impact is on network transaction revenue.
With
respect to the rest of the P&L, we expect total non-GAAP expenses to be
approximately $108 million for the third quarter. Contained within this are high-level
estimates of cost of revenue of roughly $42 million, R&D of approximately
$16 million, sales and marketing of approximately $38 million, G&A of
roughly $12 million and, in addition, we expect a net impact from interest,
taxes, and FX of approximately $3 million expense. On a non-GAAP basis, we
expect net income of roughly $24 million plus or minus $1 million or
approximately $0.24 plus or minus $0.01. This is based on an estimated 99
million diluted shares outstanding.
In
addition, we expect to record expenses of roughly $22 million for stock-based
compensation and amortization of intangible assets including Quadrem and
b-process.
In
summary, I’m very pleased with the results for the March quarter and our
improved outlook for the June quarter and the fiscal year.
With
that, let me turn the call over to Bob.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Thanks,
Ahmed, and thanks to all of you for joining us today.
Well,
I’m certainly pleased with the solid performance we delivered once again this
quarter with total revenue, subscription revenue, network revenue, and earnings
per share all ahead of guidance, as Ahmed pointed out, but I’m also pleased
with how we continue to execute against our stated strategy of becoming the
world’s leading internet-based business commerce network. As many of you may
have seen at Ariba LIVE just last week, buyers and sellers are increasingly
using a network model to drive process improvements, savings, and competitive
advantage in their business. Whether it was examples like Anglo-American who
discussed how they’re collaborating with and developing suppliers in remote
regions of the world using the Ariba network, or GlaxoSmithKline using the
Ariba network to extend their SAP systems to drive touchless invoicing, or
other examples like Dollar Tree, who’s using the Ariba network in every portion
of its source-to-settle process, which has been helping them with their
aggressive rollout of opening more than one store each and every week. All of
these customer stories signal that the network economy has arrived and I think
perhaps more importantly that Ariba is at center stage as a key enabler of this
network economy.
I
think what was the vision of Ariba just a few years ago is now a reality.
Today, companies can automate their processes beyond their four walls, sellers
can quickly find new business opportunities with a network of prospective
customers who are in the act of buying, and buyers can now efficiently discover
and qualify new sources of supply and track and coordinate orders across their
supply chain, all of this happening in real time. And any company can have
real time transparency into their payables and receivables status, enabling
them to make more informed working capital decisions and by being part of the
Ariba network, our customers are pioneering this network economy and they’re
achieving real benefits and competitive advantage in the marketplace.
I
see this new network reality is reflected in our performance this quarter. Our
core network volume continues to grow at a very healthy clip, and we believe
our network will continue to grow over time as it scales and becomes more
deeply embedded across a wide range of global customers and business processes.
Our
performance in the second quarter also reflects our solid execution and
increasing penetration across our network, including accounts that are using
third-party applications. I see this is as a powerful growth model. We’re
unleashing more spend as we open up more nodes. We’re also improving our user
experience by combining functional innovations with an enhanced user interface,
sort of a next-generation user interface with catalogs and advanced
consumerized navigation, something some of our customers have said they’ve
never seen before available in enterprise-buying applications. This is and
will continue to enable us to extend and drive more adoption with our customers
across a broader range of their processes and spend. So this combination of
more nodes, broader adoption, and deeper spend penetration is what is fueling
our growth today and into the future.
During
this past quarter, we added 51 new logos, which extends our installed base and
potential spend penetration even further. An example of one of our new logos
is the Provincial Government, Western Cape, South Africa. They’ve tapped our
upstream sourcing and supplier information solutions. This is a network story
as well and it shows how we’re extending a network effect into all solutions
and demonstrates the breadth of Ariba’s global trading community. For example,
with this win, disadvantaged suppliers are populating their profile and
certification information once in the Ariba network making them available to
all South African government departments who’ll be able to easily search and
discover disadvantaged suppliers. The supplier information is also going to be
available to all of the other buyers on the Ariba global network and as part of
this network effect that we talked about that’s leading to many sellers wanting
to join the network, which is resulting in more than 1000 new suppliers coming
on to the network each and every week.
Our
growth opportunity is not limited to customers that use our suite of SaaS
applications, as I indicated earlier. We’re able to provide network services
to literally any company in the world irrespective of their software
preference. Case in point this quarter, Barrick Gold, a global mining company,
entered into a multi-year deal to use the Ariba network to extend their Oracle
ERP systems and enable collaborative procurement and invoicing with more than 5000
suppliers deployed across four continents. We also continue to help SAP
customers get network as well. For example, this past quarter, Bemis, a
leading packaging producer, they elected to extend their SAP SRM solutions with
a host of Ariba network-based solutions, including procurement, content, PO
automation and invoice automation, to manage service spend, work order driven
MRO materials, and also the direct materials. Once this process is fully
ramped, we will enable them to automate and extend their procurement and
invoicing processes to several thousand suppliers.
We
closed a similar deal at another major SAP account. A global electrical
products manufacturer selected Ariba due to our integrated collaborative
procurement approach and our global capabilities. In this particular case, we’ll
extend their back-end SAP environment to automate PO and invoice processes with
more than 20,000 global suppliers. In think one thing that’s common in each of
these examples is that with the power of the network, which prevailed for Ariba
as more and more companies are realizing the benefits of being part of a
many-to-many network. We also continue to make progress against our initiative
to expand our reach and add buyers through strategic alliances. This quarter,
we added two new partners that will contribute in this area and talked about it
at Ariba LIVE last week.
We
announced a partnership with Microsoft to connect 10,000 Microsoft dynamic ERP
and CRM customers to the Ariba network enabling buyers and sellers to engage in
the Ariba community and extend their procurement sales and finance processes to
their trading partners. This gives our network access to thousands of
companies we would never have been calling on ourselves.
Another
partnership to highlight is Dell Boomi. We will support this Microsoft to
Ariba network integration model through our strategic alliance with Dell Boomi,
which provides a standard set of predefined out-of-the-box integrations from
Microsoft Dynamics to the Ariba network. We’re also going to make the Dell
Boomi integration as a service offering available for integration between Ariba
applications and our customers’ back office ERP systems.
Both
of these partnerships, albeit in the first inning right now, over time will
enable us to more easily tap into the commerce of thousands of new companies
using third-party software and expand their reach in the volume of our network.
The
next major component of the growth strategy is our increased focus on customer
adoption and spend penetration, in this case, with existing customers. An
example we talk about here is a large mining company and one of our longtime
network users. This company continues to grow through expansion. They’ve
committed to leveraging the Ariba network to automate their complex and highly
collaborative field service procurement and invoicing activities and due to the
remote location of its employees and sites, they’re going to largely use our
mobility solutions to place requests and collaborate from mobile devices in the
field. This company is already one of our top customers on the network and
they continue to grow at a rapid clip as we broaden our reach into their spend,
which today already helps them connect with more than 5000 suppliers.
The
final prong of our strategy is our continued focus on developing and
innovations around our product that contribute and enhance the network effect
of our business with a major push on creating a superior user experience. For
buyers, we launched our next generation catalog and user interface products.
If any of you were at Ariba LIVE, you would have seen the demonstration on the
main stage. It further consumerizes business commerce. In this case, we’re
talking about the procure-to-pay experience by providing frontline buyers or
requisitioners with a highly intuitive consumer-like shopping experience across
all aspects of the buying process and the feedback from customers has been extremely
positive with many customers describing it to us as the Amazon for business.
For
sellers, we got some innovation there as well, our unified seller experience or
what we call the seller collaboration console. It’s enabling sellers to manage
all their processes from lead management to negotiations, order and invoice
management, for all of the – to all of the community collaboration with all of
their customers on a network through one single console. It’s just like
managing all of your relationships and groups of interactions through a single
console in your Facebook account and I think it’s part of our focus on offering
increased value and solutions to suppliers.
All
of us here at Ariba, we’re very encouraged by the progress we’re making against
our strategy. I believe we are expanding our lead in this network economy and
our results this quarter reinforced not only the strategy, but provides us the
confidence in our business going forward and once again enabled us to raise
expectations for the full year.
So
with that, let me turn the call back to the operator and open the line for your
questions.
Operator
Thank you. We will
now be conducting a question-and-answer session. If you would like to ask a
question, please press *1 on your telephone keypad. A confirmation tone will
indicate your line is in the question queue. You may press *2 if you would
like to remove your question from the queue. For participants using speaker
equipment, it may be necessary to pick up your handset before pressing the *
keys. One moment please while we pool for questions.
Thank
you. Our first question comes from the line of Greg Dunham with Goldman Sachs.
Please proceed with your questions
Gregory Dunham – Goldman Sach
Hi.
Yes. Thanks for taking my questions. I want to hit on the volume acceleration
from 23% to 25% in the quarter, off of a much bigger base actually. So how
much of that is the new farming initiative that you put in place the past 18
months? And in what inning are we in terms of that initiative really driving
acceleration and the network volume?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Hi,
Greg. This is Bob. I think it’s largely driven by our customer management
organization, sort of. That’s what we call our farming organization, really
just got underway here in the last two quarters. So I think this is a good
early sign that we see an increase in the spend going through the network.
Still in the very, very early innings of that. I don’t want to jump to any
conclusions after just one quarter, but we’re pleased with the uptick in volume
in the network. And between the volume and the network and the chargeable
relationships, we continue to remain confident in that 20% to 30% growth that
we’ve forecasted pretty consistently now in terms of network revenue but a good
early start for the organization internally though.
Gregory Dunham – Goldman Sach
One
followup, I guess, on a different topic. Amazon, a couple days ago, announced
that they’re going to do MRO category for B2B. Can you talk about that in the
context of what that does versus kind of the offering that you’re giving your
kind of Fortune 100 customers and how does their entry into the market impact
the overall B2B market from a supplier and buyer perspective?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Yes.
I see the Amazon supply or the announcement they made recently. I see that as
a marketplace for MRO activity. This is already - there’s a number of players
in the MRO space from Grainger to companies like ThomasNet. I actually see
this Amazon supply opportunity as an additional partnership opportunity for us
as they build that marketplace and they build a sort of a community of
suppliers, just like we did with ThomasNet, which is in this area. We
partnered with them and brought all their suppliers into the network. I think
Amazon could become an additional partner opportunity for us.
Gregory Dunham – Goldman Sach
Thank
you.
Operator
Thank
you. Our next question comes from the line of Peter Goldmacher with Cowen and
Company. Please proceed with your questions.
Peter Goldmacher – Cowen and Company
Hi,
guys. I wanted to ask you sort of a philosophical question, Ahmed. You’ve
talked a number of times about you feel like you want to maintain a certain
margin level because you feel like margins beyond that level are best spent
investing back in the business. And this quarter, we saw probably more margin
upside than I think most people have modeled, but we also saw the traditional
software business a little bit softer than we’ve seen it in a long time. And I’m
just wondering, you guys have positioned the ASN as really the crown jewels for
a long time. And for the first time, it’s the lion’s share of the revenue, which
is just fantastic. But I’m wondering, are you thinking differently about the
core software business now? And when you’re modeling the business, looking
forward, what is that right margin level and how are you thinking about
investing in the more traditional software business?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
This
is Bob, Peter. I’ll let Ahmed answer the margin side of your question. As far
as how we’re thinking about the software business, we’re not thinking any
differently about it. I think it’s – probably the best way to think about it
is we evolved from a company that was a software company that had a network to
a network company that has software. So software is still an important part of
the business. It’s just not the only part of the business. And we have
modeled that our software application business would grow 15% to 20%. We
continue to be in that range. Sometimes we’ll be at the higher end of the
range, sometimes we’ll be at the lower end of the range, but we’re going to be
in that 15% to 20% range and I expect we’ll continue to be there. So the fact
that we are looking to connect our network to customers that might be using
some other software, I view that really as an addition instead of a takeaway to
the extent we make a software sale, and we’re still motivated to make software
sales. We tie in the network. I just don’t want to be closed off. I don’t
want to limit the network to only customers that are using Ariba software. So
I really see this complementary and not something that we’re deemphasizing at
all.
Peter Goldmacher – Cowen and Company
Well,
Bob, I know you made that commitment because I remember your Ariba LIVE in
Arizona about six years ago where you made that strategic decision but its software
revenue this quarter was the lowest it’s been in probably about just looking
back certainly through last year. And you’re maintaining, sort of, that you
can still think it’s going to be 15-ish%. And I don’t want to harp on really
the only thing you could nitpick out on the quarter, but as you’re investing in
all these other network businesses, is software being de-emphasized? Should we
start to think about it differently?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
I
wouldn’t say de-emphasized. I think you ought to think about it in context of
the overall business model that we have, where we’re going to grow our combined
subscription revenues in that 15% to 25% range. We’re growing 21% or 22%
combined now. We got network at the high end and we’ve got software a little
bit below that. I think the network will always grow faster than the
software. And to some degree, if we’re thinking differently, we will take
smaller software deals just to get the network plugged in and sort of that
land-and-expand strategy rather than -- maybe a few years ago, we would have
been pushing for bigger software deals. And that might be the only thing that’s
changing in the business, but certainly not a de-emphasis of the software
business at all.
Peter Goldmacher – Cowen and Company
Okay.
And, Ahmed, on the margins?
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
Yes,
so I mean, Peter, if you take the -- I think you’re picking up on the right
beat. At the end of the day, as the network revenue or the network business
continues to grow, it’s obviously already surpassed, there’s going to be more
drop to the bottom line. So if you look at this particular quarter in Q2 and
how we’re thinking about the rest of the year, I committed to 19% to 20%. I’m
expecting to stay at 20% for the current year. The reason this particular
quarter was slightly higher is just simply the timing of hiring and so on. So
at the end of the day, when you look at it, we’ve hired over 322 people in the
last 12 months, and we’re continuing to invest heavily in the business. The
fact that this quarter was at 21%, I wouldn’t interpret anything out of it.
The model should be a 20% for the year. The medium term model continues to be
at 20% to 25%, and your philosophical conclusion that with the network that
leverage becomes easier is 100% right.
Peter Goldmacher – Cowen and Company
Okay.
Thanks guys.
Operator
Thank
you. Our next question comes from the Tom Ernst of Deutshce Bank. Please
proceed with your questions.
Thomas Ernst – Deutsche Bank AG
Good
afternoon, guys. Thanks for talking my questions.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Hi,
Tom.
Thomas Ernst – Deutsche Bank AG
So
with the strong performance in network and the outlook, in particular, we are
seeing more upside, I’m curious about the acquisitions. We’re now a year past
the Quadrem deal closure, so this fourth quarter. And the question for you,
how was that business tracking, particularly the b-process? Are you finding
that that’s helping accelerate volumes or customer acquisition in Quadrem? And
what are you looking at in key metrics in that? And then as a followup I’d
like to ask you about how this applies to your M&A strategies going forward?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
So
the rationale for the Quadrem acquisition and to some extent the rationale for
the b-process acquisition was similar. It was really about building out our
geographic footprint. So it gave us a strong position in markets we were not
strong in. It fit like a glove. Ariba was strong. Legacy Ariba was strong in
North America and Europe and Quadrem was stronger in the southern hemisphere,
in Asia. So that gave us that real good solid footprint around the world.
That’s still the case.
The
other reason was we thought there were some customers there that were largely
network customers that we would also be able to sell software into those
markets. We’re starting to see some early wins in terms of some software
sales, not only with Quadrem customers, but even non – some new customers down
in their markets as well. So that’s been validated.
And
the other reason is one of the things that we learned from Quadrem was -- since
we originated as a software company and they originated as a network company.
They actually got to this concept of farming before we did and so one of the
synergies we thought we’d find in the business is exporting or importing some
of their farming capabilities and techniques into the core Ariba business. And
that largely was the foundation for the customer management organization we put
in place over the last couple of quarters. And as we highlighted in one of the
earlier questions, that appears to be going pretty well, in addition, because
we see an uptick in the spend in the network.
So
I think all of that’s playing out pretty well. It’s a little over a year now
with Quadrem. I think you could say many of the same things about b-process
just a far, far smaller example. B-process was really more about getting a
little bit deeper into Europe, particularly in Southern Europe, and building
out the network of suppliers there. It’s a fraction of the size where Quadrem
was, but the concepts and the principle was pretty much the same. I would just
say it’s too early to comment on whether or not we’ve learned anything relative
to our expectations. And that is only less than two quarters since we closed
that deal.
Thomas Ernst – Deutsche Bank AG
Okay.
Interesting. It sounds encouraging. Specifically, though, has Quadrem – how
has that been tracking? I know you’re not breaking it out for us, but how has
it been tracking in terms of its growth and its renewal rates? Has it been
consistent accelerating, decelerating for you?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
I
think consistent - renewal rates have been consistent. I think the business
has been pretty consistent for us as well since we’ve combined the two
companies. I don’t see any - we really don’t track Quadrem as a stand-alone
business any longer because it’s fully integrated. But the sense you have
because most of their business was in the Southern hemisphere, that business
continues to grow nicely.
Thomas Ernst – Deutsche Bank AG
Okay.
And the last followup for me. When you acquired Quadrem, you told us that this
could be step one, are you encouraging this strategy? Might you be more
aggressive, less aggressive in terms of deals like Quadrem looking forward?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
That
continues to be -- there aren’t any very large companies out there that’s on
our radar screen right now. But there’s always a handful of companies that are
on our radar for potential M&A. And I think that’s something that will --
hard to forecast, hard to predict as to when the time is right, but they’ll
have similar characteristics in the sense that’ll be network focused and it’ll
open up the opportunity for us in either new markets. Or perhaps they’re in a
vertical or a category of spend that we think would be a complementary addition
to Ariba.
Thomas Ernst – Deutsche Bank AG
Thank
you again.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Okay.
Operator
Thank
you. Our next question comes from the line of Robert Breza with RBC Capital
Markets. Please proceed with your questions.
Robert Breza – RBC Capital Markets
Hi.
Good afternoon, everybody. Thanks for taking my question.
Bob,
maybe just to ask a couple of different ways around the volume side, have you
seen any volume increases? Or as you build out, maybe your network by
geography, would be seen a new set of kind of suppliers by geography come on
board?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
No,
I think now with the Quadrem acquisition, we’re pretty well balanced across all
the major geographies, and we’re seeing some pretty good growth coming out of
all parts of the network, all geographies, really can’t discern one versus
another.
Robert Breza – RBC Capital Markets
Okay.
And then maybe just -- I would love to just get a character or kind of a
customer profile as you think about volume. As you bring on a new customer,
you talked about the 51 new logos this quarter. What kind of percent of
increase do you see those new customers add to volume? As you think about,
like the first year, obviously, starts from a low base. But we’d love to just
understand the progression of those new logos and as they kind of help
contribute to their own volume.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Yes,
I think it really depends on the application, Rob. You have -- if it’s a P2P
application, that one is going to bring spend on a little bit slower because
customers are going to be looking to bring that spend into that process, the procure-to-pay
process. That’s fragmented spend that’s spread all over the company today, and
they need to really go after one category at a time. And there’s a bit of a
change of management, so it’s a little bit slower. And you might not see a lot
of spend for the first 12 months. And then in the second 12 months, you’d see
it start to ramp. Some of the network applications like invoice automation or
closer to the invoice side of the business, that spend that’s already happening
in an organization today. It’s already sitting in a software somewhere. It’s
just the process of stopping at the edge of the firewall, and what the network
application or in this case invoice comes in allows us to do is just get right
in between existing spend and suppliers and become a connection. So you’ll see
spend ramp on the network a lot faster on those applications. And we’ll always
have a good mix of the deals that we’re doing, whether they’re P2P or
invoice-related applications. And some will bring spend on sooner than others,
but over the course of 24 months, 36 months, there won’t be much of a
difference, just about the rate and pace.
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
Robert,
if I may just complement Bob and actually the prior similar question. It’s
always important when you’re thinking about our growth on the network side is
to keep it within the 20% to 30%, which we’ve been pretty consistent on. We’re
very encouraged by the volume growth. Some of that is, obviously, the macro
improving to Bob’s point across our portfolio, particularly in emerging markets.
Subjectively, what’s happening at the customer level, our own focus with the
customer management organizations but in any given quarter, it’s about all
multiples, volumes, chargeable relationships, and so on. And so I would
encourage you to stick with my guidance in terms of revenue for the current
year as well as how we think about it for the future at a similar CAGR that we’ve
maintained for the last several years.
Robert Breza – RBC Capital Markets
No,
that makes sense. Maybe, Ahmed, just one followup. Taxes, how should we be
thinking about taxes and, maybe I missed it, for next quarter and maybe for the
remainder of the year? Thanks.
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
Yes,
I think I gave you the number. It’s $3 million for Q3.
Robert Breza – RBC Capital Markets
Okay.
Thank you.
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
And
that includes the entire other line, so it’s taxes, interests, and other
income.
Robert Breza – RBC Capital Markets
Yeah.
Operator
Thank
you. Our next question comes from the line of Lauren Choi with JPMorgan.
Please proceed with your questions.
Lauren Choi – JPMorgan
Hi,
guys.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Lauren.
Lauren Choi – JPMorgan
Hi.
I just had another question around the investments. So the past couple of
years, you guys always kind of gave this full-year guidance where you’re like,
we’re spending a certain amount of EPS on investments. Are you still thinking
about it that way? And if you are, what is – how much of the EPS is going
towards investment this year?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Lauren,
can you just repeat that question? Ahmed was looking something up and he didn’t
realize it was aimed for you.
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
I’m
sorry, Lauren. Yeah. I was talking to Bob. Apologies.
Lauren Choi – JPMorgan
No.
No problem. Yes, so in the past, I think, Ahmed, you’ve always kind of talked
about investments being, let’s say, like $0.15 of earnings type of thing. I
just wanted to understand if you had – are you still looking at 2012 in a
similar way? And where would that be?
Ahmed Rubaie – Ariba, Inc. – Chief Financial Officer
Yes,
I mean again for 2012, just to be abundantly clear, we’re going to stick to
delivering 20% operating margins. What will be incremental investment above
and beyond the $0.98 I guided, I would say probably about $0.25 to $0.27,
Lauren.
Lauren Choi – JPMorgan
Okay.
And then I guess in a similar fashion around investments. So in the past, the
investments were really in salesforce. I think you guys talked about reducing
sales cycle, I guess now also cultivating that farming sales type of person or
culture. I just wanted to understand, is there anything else that you guys aren’t
doing in 2012 that’s in addition to that stuff?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Yes.
We’re also focused on the technology part of the business. As you build, as
you focus more at the customer level, that brings more enhancements that are
universal across. We talked at Ariba LIVE about the unified selling
experience, multiple other innovations that we’re bringing to the table, and
you can see that in the P&L as you look at the R&D line sequentially
every quarter.
Lauren Choi – JPMorgan
Okay.
And, Bob, so the last time you guys had a pricing increase was in 2010, right?
And I think you guys have said in a few years, maybe 3, 4 years, there could be
another pricing increase. Have you guys started thinking about that?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Well,
I’ve always felt there’s an opportunity to get a better yield than we currently
do out of the network. I think today we have an effective yield of only about
5 basis points. Our pricing is 15 basis points, but it’s free for some
suppliers up to a certain level. So we got a net yield today of about 5, maybe
a little bit more than 5 basis points. The opportunity is certainly there to
drive that yield up through business model changes, whether we change the basis
points or we change some of the caps or some of the floors. I like to put some
time in between those changes. And so I don’t anticipate any changes in the
near-term here, but that opportunity remains. And like we have in the past,
you’ll probably see, every two years to three years, there’ll be some tweak.
And when we do, Ahmed -- Ahmed’s always quick to remind everybody, let’s stick
to this 20% to 30% growth in the network revenue. We’ve been at the higher end
of that range, if anything, a little bit over it. I think whenever we do a
model change, we tend to be above 30%. So without a model change, we’ll be
similar to what you see today, high-20s, somewhere between the 20% and 30%
range. And as the model change, it should be periods when we’re above our
target range. I just don’t have anything that we’ll talk about in the next
couple of quarters on that.
Lauren Choi – JPMorgan
Okay.
No problem. And then just last question. Given the e-Commerce volumes that
you do see, I’m guessing you do see like geographically strengths and
weaknesses. Can you just touch upon where you’re seeing a lot of your customer
spending and maybe weaknesses also in other geographies?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
We
see good growth in all of the geographies. Now part of that is you could have
a North American company that’s buying more, but sourcing it from another
region. So it’s hard to map the macro trends necessarily that you see from
company reported results back to where you see the supplier of volumes in
there. But with that said, I think it’s pretty consistent right now from what
we see across the geographies. We’re obviously growing much faster than the
economy as we’re driving deeper penetration but there probably is a little bit
of a macro pickup couple of points, possibly a macro pickup in the numbers
there. But for the most part, this is a – we’re growing a penetration with our
customers in every geography. And they’re doing business with suppliers in
almost every geography so we see a good balanced set of growth across
everywhere we slice the network.
Lauren Choi – JPMorgan
Great.
Nice job, guys.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Thanks,
Lauren.
Operator
Thank
you. Our next question comes from the line of Richard Williams with Cross
Research. Please proceed with your questions.
Richard Williams – Cross Research
Hi,
guys. Thanks for taking my questions. Just thinking back to prior calls.
Bob, you talked about some of the large one time a year auction events bringing
them on to the network to boost the volumes. How has that gone and to what
degree do you get carryover business from those big guys?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
One
time? I’m not sure I follow the question, Richard. One time a year?
Richard Williams – Cross Research
The
single auction event per year. There’s some very large, non-repetitive stuff
direct procurement. We can talk about that offline.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Yes,
maybe we can pick up with Ahmed offline. It’s not ringing a bell with me,
Richard.
Richard Williams – Cross Research
Okay.
No problem. Also partners and VARs (ph), are you seeing any opportunities to
leverage the growth rate and the customer maturation rate by using partners?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Yes.
So our partner approach is really taken to sort of two dimensions to it. On
one hand, our initial partnerships were with the BPO providers to get our
platform, our software platform to become the standard platform that BPO
providers would use in their business. And in a lot of ways, we see finance or
procurement BPO providers being a very, very large accounts payable
department. So we want to get our invoicing applications and our P2P
applications into that. And that’s going to drive all that spend they’re
managing out to the network. So we feel pretty good that our applications today
are the standard that with three big BPO providers are using for their
solutions for customers, whether it be Genpact, IBM or Accenture. So we feel
pretty good on the partnership side there.
More
recently, and I think that some of the partnerships I talked about in the call
today, we’re looking to strike alliances with other software vendors that have
access to a lot of customers and a lot of customers spend that we would never
get at largely because they tend to be smaller businesses. So if you think back
a couple of quarters, we did a partnership with Netsuite. And more recently we
just did a partnership with Microsoft Dynamics. There’s thousands of companies
there that use that software. And realistically, we never would get to them
selling our software, so this is an opportunity to connect our network to their
customers. And that’s our current focus. Now all of those partnerships are
relatively new, so there’s not a lot to point to on that just yet. Obviously,
the Microsoft one is brand new, but we think over the next year or two, that’s
going to present a real good opportunity for us.
Richard Williams – Cross Research
Also
could you help with just the magnitude of opportunity that comes from Discount
Pro?
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
The
magnitude of opportunity that comes from Discount Pro? I think it’s just one
of the many network-related opportunities that we offer our customers out there.
I wouldn’t want to single out the opportunity on any one solution. I think it’s
part of the mix. I think it’s the reason why a lot of companies want to put
more and more spend on the network that opens up an opportunity that not only
automate their process with their suppliers, but whether it be Discount Pro or
be some of the working capital management solutions, I think it opens up
additional opportunities for them to either get better savings through better
discounts or better working capital management. So I think it’s part of the
mix and not any one of these items is the reason companies are coming to us.
It’s really part of the broad opportunity.
Richard Williams – Cross Research
Okay.
Well, thanks very much.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Okay, Richard,
Operator
Thank
you. I would now like to turn the call back over to Mr. Calderoni for closing
comments.
Robert M. Calderoni – Ariba, Inc. – Chairman and Chief
Executive Officer
Okay.
Thank you. Thanks all of you for joining us today. We’re very pleased with
the progress we’re making in the organization, not only with the financial
results, but with a number of the nonfinancial items that we’re executing to,
to our strategy of building Ariba to be in the world’s leading
business-to-business commerce network. So I look forward to seeing many of you
over the next 90 days. And thanks for your participation. Take care.
Operator
This
concludes today’s teleconference. You may disconnect your lines at this time.
And thank you for your participation.
