Based in Sunnyvale, California, Ariba Inc. (Nasdaq: ARBA) is a developer of business-to-business e-commerce solutions. It went public in June. The company's Ariba Operating Resource Management System (ORMS) helps companies automate operating resources purchases. The system includes maintenance, repair, and operations (MRO) expense, travel and expense (T&E), and services expense management applications. We talked with CFO Edward Kinsey about Ariba's products, its competitors, and the company's place in the enterprise software market of the future.
TMF: Could you describe what Ariba does and what your market opportunity is?
Kinsey: We connect buyers and sellers through the Internet and really formulate the basis of business-to-business electronic commerce. That allows buyers and sellers to execute transactions. We also provide workflow, approval flow, all the things within the firewall of an organization and within the enterprise, [and] actually provide benefits that deliver return on investments. So we help focus your investments to particular vendors or to achieve economies to scale, those types of things. But it all comes back to being the premier business-to-business e-commerce network.
TMF: How long does it usually take for a typical client to install your system and see results from the cost savings? Are there any examples off the top of your head you can think of?
Kinsey: Yeah. There's Seagate (NYSE: SEG). We announced in a press release that they went live in four months. It really depends upon the environment, the ERP [enterprise resource planning] or the client server enterprise application environment of the company. And by that I mean the financial applications and all those things. [As] to whether they want to use it to stand alone or to completely integrate it, 99% of the customers want to integrate it completely. Seagate's an example of that. They are a very large site for one of the big client-server companies, and they did it in four months.
TMF: One of your other customers, Cisco Systems (Nasdaq: CSCO), has integrated your system along with an ERP system from Oracle (Nasdaq: ORCL) and a human resource management system (HRMS) from PeopleSoft (Nasdaq: PSFT). Do you think these other enterprise solutions might one day converge into a single solution or do you think they are going to remain distinct from one another?
Kinsey: I can only speak from the customer's viewpoint and what you see in a customer environment is that they all have multiple ERP environments. Cisco is a good example. They believe that PeopleSoft's HRMS is the best. That's what they use. They're pleased with Oracle financials. That's what they use and they integrate it.
I'll give you another case in point. It's Chevron (NYSE: CHV). It's perceived to be a very large SAP (NYSE: SAP) shop. It is, but their largest operating unit is on [a system from] J.D. Edwards (Nasdaq: JDEC) and it's been that way for five years. So even in that environment, you haven't seen a consolidation. I really believe and we really believe it will continue to be very multiple ERP-oriented in the Global 2000, Fortune 500, and very large organizations.
"Every dollar you spend on what you capture, in what we call operating resources, goes right to the bottom line. The sooner you can capture that and realize the savings, the better."
TMF: Do you think the ERP vendors will start getting into the operating resource management, getting into your business in any way?
Kinsey: Some of them have announced things, as they've done in other particular types of products. But the interesting thing to keep in mind is that most of the large organizations that they are targeting are multiple ERP environments. They're only going to be able to capture the spend in those environments there on their systems.
TMF: And that is what separates Ariba from the rest of the competitors?
Kinsey: Yes, I think one top level differentiation is really the multiple ERP capability. Our solution interfaces with all of the large ERP, including even the J.D. Edwards, which goes after even the middle market strategy. That independence is important when you have an environment where you have a number of ERP systems.
Speaking from a CFO's view, you're really looking at savings. Every dollar you spend on what you capture, in what we call operating resources, goes right to the bottom line. The sooner you can capture that and realize the savings, the better. If you have different ERP systems in different parts of your enterprise, you have a very large limiting factor. If you're an Oracle [organization] and in part of your organization you want to go with an Oracle solution, that's only going to capture that particular piece of spend.
TMF: One general trend we've seen companies talking about in enterprise software is that companies are shifting from legacy Y2K spending and ERP systems integration into spending money for e-commerce applications. Has this been the trend that you've been seeing? Has there been a major shift right now in the industry toward e-commerce above anything else?
Kinsey: There's certainly a shift to make a focus to automate and to provide the benefits of business-to-business e-commerce in your organization. Suppliers and buyers both are all focused on that automating, capturing, spending, integrating information, all of that that comes into what we refer to as business-to-business e-commerce.
TMF: Business-to-business e-commerce has obviously gotten a lot of attention in the media lately. Are there any misperceptions about the sector that you think should be cleared up or are most people really getting it?
Kinsey: I think people are getting it, but the most important thing is the significance of building a critical mass of buyers and suppliers and thereby providing a very large network. That's an important element of it. And capturing the buyers first has been a piece that we have found to be very strategic because the buyers have the money, and the money tends to speak. It's the golden rule.
People understand the benefits of business-to-business e-commerce in their business. In fact, they see that and they see the ROI [return on investment] much quicker than they saw the ROI from an ERP implementation. You can touch and feel savings.
"We as a company of 400 people are delivering savings to the bottom line using the product."
And an example that we use very frequently is from one of our customers. Before they were able to automate and capture their spend, they had nine or ten different vendors [of a commodity] and sometimes they were cross-shipping across the country when there was a vendor close by. They had a wide range of prices. They used the tools of our system to consolidate all of that. They saved in the range of 30%-40%, which went right to their bottom line by focusing all of their buying power on one supplier of that commodity.
TMF: Do you think your systems are only going to have major effects on companies that have lots of suppliers or can it benefit companies with a small number of suppliers as well?
Kinsey: It can have benefits for companies with a small number of suppliers. We use Ariba ORM, we use Ariba T&E. We internally at Ariba are a PeopleSoft shop. Just the T&E alone, the way that we are able to automate and capture our spend on travel is incredible. We're able to focus our spend to the airlines where we have negotiated contracts. We're able to make sure that people don't take connections that are more costly [and] stay in hotels where we have contracts. We as a company of 400 people are delivering savings to the bottom line using the product.
TMF: Can you talk a little about the Ariba network? How do you see that network growing and driving revenues in the future?
Kinsey: The first thing is the transaction flow, which is the buyers or the eyeballs that are using the network. That has grown since we really initiated the whole business-to-business e-commerce solution. It's continuing to grow today. What we are seeing is more transactions flowing through. We believe we will continue to see that in the future.
TMF: What should investors understand about your revenue recognition policies? Will recognizing revenues over the life of the subscriptions result in lumpier earnings compared to some other companies?
Kinsey: It results in predictable earnings. It gives us visibility in the future periods. And because of that, signing a particular deal at the end of a quarter does not affect our earnings for that quarter.
TMF: What other elements of the financial dynamics of the company might be new or unfamiliar to investors?
Kinsey: I think there's really three important things. First of all, you alluded earlier to some of the signals you are seeing from the old ERP type of companies. There is visibility. They are making signals. That's really expanded our pipeline. Our business pipeline right now is as strong as it's ever been. And we believe that is in some part due to the fact that the old ERP type companies are announcing that they are planning to be in the space.
Number two, we have built a critical mass of buyers and suppliers. We continue to do that. If you count just the supplier side alone, we announced last quarter more than 350 peer suppliers. That continues to grow. If you drill that down to the network sub-suppliers, it's tens of thousands. And we're continuing our vision to be the premier business-to-business e-commerce network. We started a pilot phase of our network a few months back. We are installing a customer site where live transactions are flowing. We believe that's a key part of the Ariba story going forward.
TMF: Has going public changed the culture inside the company in any way or your day-to-day operations? Have there been any big surprises from the effects of the IPO experience?
Kinsey: No. There's been no surprises, because the one thing about Ariba that's always been true is the strength of the execution -- the focus and the execution. We were focused on having the infrastructure for post-IPO long before we were even planning the details of the IPO. So, when the IPO came about, it was just another step. We talked about it and it wasn't like graduating from your Ph.D. program. It was really like graduating from high school. The good news is that high school's done, but you've got college to go through. It's actually going to be a little more grueling and we've always been ready for that. So we continue our focus and we continue our execution and we're building our base of buyers and suppliers.
TMF: Great. You have an exciting company, Mr. Kinsey. I really appreciate you taking the time to talk to us about it.
Kinsey: My pleasure.