Ariba's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Ariba (ARBA)

Q2 2012 Earnings Call

April 26, 2012 5:00 pm ET

Executives

John Duncan -

Ahmed Rubaie - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Robert M. Calderoni - Chairman, Chief Executive Officer and Member of Equity Incentive Committee

Analysts

Gregory Dunham - Goldman Sachs Group Inc., Research Division

Peter L. Goldmacher - Cowen and Company, LLC, Research Division

Thomas Ernst - Deutsche Bank AG, Research Division

Robert P. Breza - RBC Capital Markets, LLC, Research Division

Lauren Choi

Richard T. Williams - Cross Research LLC

Presentation

Operator

Greetings. And welcome to the Ariba Second Quarter Fiscal Year 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Duncan, Vice President of Investor Relations for Ariba. Thank you. Mr. Duncan, you may begin.

John Duncan

Good afternoon. And welcome, everyone, to Ariba's conference call to discuss results for the second quarter of fiscal year 2012. In today's call, we'll make reference to supplemental presentation slides with our prepared remarks. To access these slides, please log on to Investor Relations section at our website at www.ariba.com. Our speakers for the call today are Bob Calderoni, our Chairman and Chief Executive Officer; and Ahmed Rubaie, our Chief Financial Officer. For those on the call accessing the supplement presentations, please now advance to Slide 2.

Before we begin, I'll read the Safe Harbor statement. Statements that may be made on this call and the supplemental slides that are not historical facts may be forward-looking statements, including statements regarding the company's or management's intentions, hopes, beliefs, plans, expectations or strategies for the future. These statements are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations. These risks and uncertainties are discussed in the company's SEC filings, including our most recent Form 10-Q filed on February 7, 2012.

During the course of this call, we will reference historical non-GAAP financial measures. The management reviews non-GAAP financial information in evaluating Ariba's historical and projected financial performance and believes that it may assist investors in assessing its ongoing operations. The presentation of this additional information is not meant to be considered in isolation or as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. For a reconciliation of historical non-GAAP to GAAP financial measures, please see the earnings press release and supplemental analysis on the Investor Relations section of our website at www.ariba.com or our Form 8-K filed this afternoon.

In addition, we will reference certain forward-looking non-GAAP financial information, including fiscal year 2012 revenues, expenses and net income. We're unable to reconcile this forward-looking non-GAAP financial information to corresponding forward-looking GAAP measures because we are unable to estimate without unreasonable efforts certain forward-looking GAAP revenue expense and other income items.

At this time, I would like to turn the call over to Ahmed Rubaie to review the financial highlights for the quarter.

Ahmed Rubaie

Thanks, John. Good afternoon, everyone, and thank you for joining us today to review Ariba's second quarter results. Ariba delivered another strong quarter. We were above the top end of our guidance on revenue, primarily due to the continued rapid growth of our network revenue. This is not only the fastest growing component of our business. It is now also the largest contributor to our highly profitable recurrent Subscription Software revenue.

Our revenue outperformance combined with the inherent leverage of our network business and focus on scaling our businesses efficiently as balance with investments for tomorrow's growth contributed to non-GAAP EPS, but also exceeded the high end of our guidance. We are very pleased with the trajectory of our business, and accordingly, we are raising our revenue EPS and cash flow guidance for the full year.

Now let me walk you through the highlights for the second quarter. Please turn to Slide 3. Our annualized Subscription Software backlog increased to $220 million, up 20% year-over-year. Our trailing 12-month network volumes rose to approximately $319 billion, up 25% year-over-year organically. In tandem, we continued to increase participation and our chargeable relationships rose to approximately $98,300 or 18% year-over-year organic growth.

Please turn to Slide 4. Our highly profitable recurring Subscription Software revenue was $89.2 million for the quarter, exceeded our guidance and is up 32% year-over-year and up 21% organically at constant currency. As I mentioned a moment ago, the driver of our subscription revenue growth is our network revenue, which showed continued strength at $45.4 million in the quarter, up 59% year-over-year and 31% organically at constant currency. We were very pleased with the continued growth in the network transactions across the globe. Renewal rate continue to be solid: network at approximately 95% and other applications at approximately 90%. This is an indication of business value that we are delivering to our customers.

On to operating cash flow and the old adage that cash is king. We are pleased to have set a record in the March quarter where we generated $44.4 million of operating cash flow before lease loss, which is up significantly by approximately $50 million or approximately 50% from the same quarter last year. Including lease loss of $5.7 million, Q2 net cash flow was $38.7 million. Remember that the lease loss impact from the legacy Sunnyvale campus will end next January.

Now let me turn to more specific financial results for the March quarter. Please turn to Slide 6. Total revenue increased 21% year-over-year to $131.5 million for the second quarter, above our guidance range of $128.5 million plus or minus $2 million. Subscription of maintenance revenue was $102.1 million, exceeding our guidance of $99 million, plus or minus $2 million. Subscription Software revenue was $89.2 million, also exceeding our guidance of $86.5 million, plus or minus $2 million, and as mentioned a moment ago, up 32% year-over-year and up 21% organically at constant currency.

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