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Ariba: The Pain of a B2B Pioneer

By Steve Hamm Since the business-to-business software markets hit the skids in early 2001, Ariba Technologies (ARBA) has done just about everything right. The fact that its future is still in doubt shows just how perilous this tech slump has been for even the best and brightest of the Internet software upstarts.

Ariba is just treading water. Last quarter, revenues came in at $58.2 million, down 7% from the same quarter a year ago, and essentially flat with each of the previous three quarters. Though Ariba is cash-flow positive, it reported a loss of $142 million due to a goodwill write-off. And its stock is trading at $3.40 a share, about where it has been for past year and a half.

No wonder 10 of the 14 analysts that cover the stock have it rated a hold, and three rate it a sell -- compared to only one buy recommendation. "They can be a survivor, but they'll probably just be a niche player," says Brad Reback, an analyst at CIBC World Markets, who rates the stock a sell. (CIBC does not have a banking relationship with Ariba.)

IN CONSTANT TOUCH. Ariba's hopes for the future rest on a major product blitz it launched last month and on the continued steady growth of the B2B industry (see BW Online 12/18/02, "B2B Isn't Dead. It's Learning"). It updated its entire suite of so-called enterprise spend-management software -- including e-procurement and supplier-management packages.

In addition, it introduced a new product called Ariba Category Management. That's collaboration software that allows a company's employees to keep in constant touch with their suppliers via the Web through the entire process of selection, negotiating contracts, and handling orders. While analysts applaud the effort, they're not ready to declare Ariba's problems over.

Far from it. Thanks to its early start in the e-procurement business, Ariba is still the market leader -- but that lead is tenuous. Market researcher AMR Research expects e-procurement and sourcing to shrink by 5%, to $1.66, billion this year but then resume growth next year and hit $3.67 billion in 2006. And it expects Ariba's market share -- 30% in 2000 and 21% in 2001 -- to continue declining this year as it faces stiffening competition.

"GO AWAY OR GET BOUGHT." Ariba is threatened from all sides. Large corporate software companies such as German powerhouse SAP (SAP) and PeopleSoft (PSFT) are coming on strong. Newer niche players, including ADX, are winning in the small- and midsize-business market. And older-format electronic data interchange (EDI) companies such as Sterling Commerce are rapidly moving their products and customers to the Internet.

Early e-procurement leaders Ariba and Commerce One "will either go away, or become a partner in a big enterprise company ecosystem, or get bought by an EDI company. It's hard for them to stand on their own and be a dominant player," says Richard Villars, analyst at tech market researcher IDC.

Ariba takes its competition seriously but believes it can stay ahead of the big guys. Says Ariba CEO Robert Calderoni: "We're keenly focused on one thing. We can out-focus our large competitors."

BIG-NAME CUSTOMERS. Indeed, focus is Calderoni's forte. In the first quarter of 2001, when the tech slump first struck Ariba, he was chief financial officer. The company immediately fired one-third of its staff of 2,400 and eliminated extraneous products -- concentrating just on helping large companies manage their procurement of everything from pencils to industrial equipment. "We had a solid core business to pull back to, and then expand," says Calderoni, who took over as CEO in October, 2001.

The most important thing Ariba has going for it is a hefty portfolio of customers, including the likes of BMW, Chevron (CVX), Cisco Systems (CSCO), and Southwest Airlines (LUV). The strategy is to sell them one product, make sure they're happy, then go back with more.

That technique is working just about perfectly with Southwest. It bought Ariba's basic e-procurement package back in June, 2000, and has more than 1,400 employees buying supplies online. This fall, the airline bought the rest of the suite, including the new collaboration software. "These guys know what they're doing," says Ray Sears, vice-president for purchasing at Southwest. "They know how to integrate all the new stuff with what we already have in production."

Happy customers -- not to mention a $280 million cash horde -- should keep Ariba in the game for a long time. The question now is: Can it remain a leader when the market it pioneered finally takes off? Hamm covers software and other technologies for BusinessWeek in New York

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