Ariba (NASDAQ:ARBA) has reached a turning point. For years, it's sold high-priced enterprise software to help companies such as Merrill Lynch (NYSE:MER), Chevron (NYSE:CVX), and ADP (NYSE:ADP) lower their procurement costs. But cheaper competitors are rendering that business model extinct.
To keep pace with the shifting market, Ariba's moving toward on-demand offerings, charging subscription fees to let clients access software delivered online. It's a big change, but Ariba seems to be managing the process nicely.
The company's fiscal second-quarter revenue, announced April 25, dipped by $300,000 to $73.4 million. However, its subscription revenue increased 15.4% to $15.7 million in the same period. The company's net loss nearly doubled to $5.1 million, or $0.07 per share.
The rocky financials aren't surprising. It's tough to revamp a business like Ariba's; the company has spent 10 years building an infrastructure that handles more than $100 billion in transactions across more than 115 countries.
The growth of on-demand players like Salesforce.com (NYSE:CRM) and NetSuite provides compelling reasons for the transition, though. Hosting software via the Internet makes it easier for customers to implement and update their systems. Subscription fees also provide recurring revenue, while the lower price point should make it easier for Ariba to pick up smaller customers.
While companies like Microsoft (NASDAQ:MSFT) and SAP (NYSE:SAP) mostly talk about on-demand software, Ariba has had the guts to make a real change, and it looks like the heavy lifting is finally over. Foolish investors shouldn't rush to get into the stock; management still needs to find ways to grow its business. All the same, it's a company worth watching.
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Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 1,784 out of 28,166 in CAPS. Microsoft is a Motley Fool Inside Value pick. The Fool has a disclosure policy.
