One of our Break Down August finalists, business-to-business Internet marketplace enabler Ariba (Nasdaq: ARBA), announced earnings recently for the quarter ending September 30th. As this company remains on our Breaker radar screen, let's see what these results tell us about Ariba's progress. To further illuminate the unfolding B2B drama, I'll splice in some comments from our phone interview with Ariba CEO Keith Krach.

When we wrote about Ariba in August, it had just come off of a blowout quarter in which they had shocked the world by more than doubling total revenues, sequentially, to reach just over $80 million for the quarter. The announcement shows just a 67% jump to $135 million for this most recent quarter. I guess most people only get to shock the world once or twice, if they're lucky.

In the enterprise software world, it's hard to make much sense of quarterly jumps in software licensing revenue, due to seasonality in corporate purchasing decisions. But when it comes to the other big piece of Ariba's business -- revenues derived from live e-market commerce -- we may be able to learn something. More specifically they should tell us something about the growth in use of Ariba e-marketplaces.

So let's break Ariba's revenue down into traditional software revenue versus revenue derived from marketplace business (all values in millions of dollars): 

Quarter end:   9/30    6/30    3/31
Software        115      65      34
Marketplace      20      16       6
Total           135      81      40
So, after growing 150% last quarter, from $6 to $16 million, marketplace revenues grew only 24% this quarter, to $20 million. This strikes me as not so hot. Certainly, this is a number to keep a close eye on in future quarters. It's way too early for this flavor of revenue growth to slow down to this degree, if Ariba is to make good on its huge market capitalization.

In our interview, Keith Krach says that the bulk of these Marketplace Revenues are still coming from revenue-sharing agreements with secure payment and logistics providers, but that he sees virtually unlimited growth possibilities on the horizon:

Buster: Any future mergers and acquisitions you do would be aligned towards providing more of the commerce services that your customers are demanding. Is that fair?

Krach: Yeah, exactly. But I also think that, in that area, 90% of what we're gonna do will be in a partnering environment. We see literally hundreds, perhaps even thousands of commerce services. It really became clear to me at our user conference down in Miami. This big eco-system, this big Ariba economy, in terms of all these different partners, all these commerce service providers, all these suppliers, all these integrators, the ASPs, this is really what is driving the momentum of our business.
Krach also mentions, in the interview, multi-company collaboration on product design and sourcing as two future commerce services offerings that are just starting to get hot. The collaboration piece will, in part, be supplied by strong partner i2 Technologies (Nasdaq: ITWO). Although i2 and Ariba compete in the market platform space, their relationship on the collaboration services front is complementary, and fits nicely with Ariba's vision of providing commerce services via partnership.

To explain the other emerging addition to Ariba's commerce services banquet, sourcing, here's some detail from the interview:
Buster: Can you explain exactly what "sourcing" means and how it is that you make money from providing this service?

Krach: Sourcing is if a buyer wants to buy some particular good or service -- and it can be very specific from a commodity standpoint -- not only would sourcing help bring lots of suppliers to that buyer, but also, most importantly, it would automate the request for quote or proposal (RFQ/RFP) process across the Internet. Makes it very efficient. This lends itself very well to reverse auctions.

For example, I was down at Bristol Meyers a few weeks ago. You know they were one of our early customers. I think they've been deployed for, like, 30,000 seats. They used the sourcing solution that we provide to actually buy a major injection molding machine which traditionally would cost them -- I could have these numbers wrong but they're in the ballpark -- $1.4 million and they were able to get it for roughly $800,000. They were really impressed by the savings they got because they used that reverse auction technology.
From this sourcing example, it's clear that Ariba intends to cut in on the essential business of more focused business-to-business auction providers like FreeMarkets (Nasdaq: FMKT). And, in this case the added service was achieved largely through acquisition (of SupplierMarket.com) as opposed to through partnership, showing Ariba still has some carnivore left in it.

On the whole, though, Ariba does seem to be distinguishing itself from Commerce One (Nasdaq: CMRC) one by staying relatively autonomous, and just positioning itself as the hub in a huge ring of partners and customers -- from buyers to sellers, from commerce service providers to systems integrators. Commerce One, on the other hand, has a bulkier model, which goes for more control, themselves, of the software, systems consulting, and integration pie, with the potential consequence that the overall pie won't grow as much.

In the conference call with analysts, Ariba's COO Larry Mueller gave his own take on the competition, in general, and on Commerce One's recent joint software development effort with back-office enterprise software king SAP (NYSE: SAP):
Larry Mueller: Well, we've actually seen a decrease (in visibility) from Oracle (Nasdaq: ORCL), and, it's interesting, the SAP/Commerce One relationship has really been one that developed from a foundation of weakness. So you take some of the weaknesses that SAP had in delivering any kind of network and the weakness Commerce One had in delivering any type of real functional buyer application and they formed a joint relationship and we don't really see exactly where that's going. And when we get involved with customer situations, they are really quite confused by it themselves and a good example is some of the very significant wins we've had in very strong SAP accounts in back office ERP. We continue to win those deals quite aggressively.
Reading between the lines, it sounds like Mueller is claiming that customers prefer to look for the best marketplace provider for marketplace applications, the best ERP vendor for back-office applications, and to let a third-party integrator make the connections. This would match his claim that Oracle is declining as a threat, since pre-integrated, end-to-end, one-stop shopping is the hallmark of Oracle's e-business strategy.

If Mueller is right, Ariba's early strength in execution could turn into long-term dominance of the business-to-business commerce arena via the role of dominant trading hub. Krach even said, in the conference call, that he wants to make Ariba's platform the "operating system of business-to-business e-commerce," stoking Microsoft comparisons.

Of course, Commerce One, which announces earnings today, has its own hub, its Global Trading Web, and its own ideas about which strategy will dominate in the long run. On balance, I'd say the Ariba earnings report continues to offer the most compelling vision, but that the reported revenue from commerce services does not yet confirm the tangible success of this vision.

Let us hear your thoughts on the Ariba discussion board.