Ariba: fall from grace

B2B high flier Ariba is showing signs of troubles. Just this week, the company scrapped a key merger deal, announced plans to cut its work force and warned of a big loss in the latest quarter.

Get ready for the massive bailout. Wall Street portrayed Ariba as the poster child for all that is right with business-to-business software, but now comes the painful separation process.

When you miss earnings estimates by 25 cents a share and bring in half the sales you were supposed to, these things tend to happen. Ariba said it sees fiscal second-quarter loss of 20 cents per share, excluding non-cash charges, on revenue of $90 million. First Call consensus was predicting a profit of 5 cents per share on revenue of $180.3 million for Ariba's second quarter ended March 31.

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The company also laid off 700 people, or a third of its work force, and canceled its acquisition of Agile Software. The canceled merger, like Ariba's profit warning, was expected by many Wall Street observers. The magnitude of the warning, however, was a shocker.

Ariba once was a Wall Street darling, but is now one of the biggest stock losers in the first quarter, down about 85 percent. It'll fall more today. Analysts that have supported the stock in the past sounded very skeptical. Get used to it.

Instead of Ariba being the consolidator in the B2B software sector, it's now likely to be a takeover target at best. "We view Ariba as a potential acquisition target for the right company," said Scott Barnum, an analyst at ABN Amro. "The company's strong product portfolio, dominance of the e-procurement space, and diminished valuation lead us to believe it could come into play over the next few quarters."

Ariba execs blamed a shocking downturn in the United States and a slowdown in Europe for its earnings and sales miss. Analysts almost instinctively asked officials whether Ariba was facing internal problems and a saturated market for exchange software. Officials said the company's woes are an economy thing.

Wall Street clearly isn't buying it. Analysts on Tuesday questioned whether Ariba can be a valuable software partner now that its business momentum is gone. They also questioned whether Ariba can compete without a full suite of products and whether it can generate repeat business. In an IT world that demands one-stop shopping, Ariba can't offer it.

Folks, the honeymoon, which has been over since the company's fiscal first-quarter report, is now officially over. Bear Stearns analyst Kaushik Shridharani noted that Ariba's "halo is gone." You can rest assured that at least some of the 40 analysts covering Ariba will lose interest.

So what happened?

If you take Ariba at face value, Oracle CEO Larry Ellison is truly an oracle. Like Oracle, Ariba said customers just aren't going to make big decisions until they get their financial houses in order.

That's true--to a degree. Ariba execs said the company's pipeline of business is strong, which may be theoretically true if customers just postponed purchases instead of cancelled them. Bottom line: We don't know about Ariba's pipeline just yet.

But something doesn't seem right here. For starters, Ariba must have had a lot of customers pull back to miss its sales targets by a country mile. Ariba couldn't have believed that it could bring in $90 million in sales in the final days of the quarter.

UBS Warburg analyst Andrew Roskill has the most plausible explanation of the Ariba debacle. An excerpt from Roskill's report where he cut Ariba from a "buy" to a "hold."

    "Management attributed the shortfall to the economic environment and last minute delays in corporate purchase decisions, across almost every geography. While this is all true, we believe there is another factor at work: Customers are increasingly looking towards larger, well-capitalized and more broadly diversified application vendors to fulfill their e-procurement needs. In our view, the sentiment is essentially, 'hey we're already an Oracle/SAP shop, and they're offering us a great deal. The Ariba product may be great, but is it worth 2-4x the price of the others?' "

That about sums it up. Roskill also noted that Ariba could have picked up privately-held companies to round out its product portfolio, but opted to chase Agile in a deal that was questionable from the start. Now Ariba finds itself without a big partner. At least Commerce One has SAP.

Ariba now faces a tough road. Executives are short on answers and investors are short on patience.

i2's warning goes over well
For an interesting contrast from Ariba's plight, check out Wall Street's reaction to i2 Technologies' first-ever profit warning. i2's profit warning pushed shares higher. Ariba shares are going to tank.

Here's the difference between i2 and Ariba, former partners who are now rivals. i2 has a long track record of topping estimates. Ariba's still young and just turned profitable a quarter ago. I2 said it will miss estimates by a few cents a share, but sales were actually above consensus targets. Ariba missed its sales and earnings targets by a wide margin.

i2 acknowledged a slowdown, but responded by laying off 10 percent of its work force. Ariba cut 33 percent in a move that observers could say is panicky.

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