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Ariba 10-Q 2008
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2008

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From                      to                     

Commission File Number 000-26299

 

 

ARIBA, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   77-0439730
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)

807 11th Avenue

Sunnyvale, California 94089

(Address of principal executive offices)

(650) 390-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company—See the definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨

Non-accelerated filer  ¨            Smaller reporting company  ¨

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock as of March 31, 2008 was 85,485,893.

 

 

 


Table of Contents

ARIBA, INC.

INDEX

 

          Page
No.

PART I. FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

   3
  

Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and September 30, 2007

   3
  

Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2008 and 2007 (unaudited)

   4
  

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2008 and 2007 (unaudited)

   5
  

Notes to Condensed Consolidated Financial Statements (unaudited)

   6

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   23

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   34

Item 4.

  

Controls and Procedures

   36

PART II. OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   38

Item 1A.

  

Risk Factors

   38

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   47

Item 3.

  

Defaults Upon Senior Securities

   47

Item 4.

  

Submission of Matters to a Vote of Security Holders

   48

Item 5.

  

Other Information

   48

Item 6.

  

Exhibits

   48
  

Signatures

   49


Table of Contents

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     March 31,
2008
    September 30,
2007
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 72,529     $ 61,311  

Marketable securities

     —         83,667  

Restricted cash

     315       820  

Accounts receivable, net of allowance for doubtful accounts of $1,619 and $1,973 as of March 31, 2008 and September 30, 2007, respectively

     30,055       29,130  

Prepaid expenses and other current assets

     8,731       10,743  
                

Total current assets

     111,630       185,671  

Property and equipment, net

     19,908       20,230  

Long-term investments

     22,107       8,048  

Restricted cash, less current portion

     29,560       29,200  

Goodwill

     406,321       326,101  

Other intangible assets, net

     30,448       10,461  

Other assets

     3,014       3,875  
                

Total assets

   $ 622,988     $ 583,586  
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 9,992     $ 10,882  

Accrued compensation and related liabilities

     23,064       24,192  

Accrued liabilities

     16,622       18,976  

Restructuring obligations

     20,638       19,065  

Deferred revenue

     88,414       76,110  

Deferred income—Softbank

     —         566  
                

Total current liabilities

     158,730       149,791  

Deferred rent obligations

     20,472       22,628  

Restructuring obligations, less current portion

     47,394       52,106  

Deferred revenue, less current portion

     6,702       7,917  

Other long-term liabilities

     6,567       —    
                

Total liabilities

     239,865       232,442  
                

Commitments and contingencies (Note 4)

    

Stockholders’ equity:

    

Common stock

     171       157  

Additional paid-in capital

     5,135,677       5,067,993  

Accumulated other comprehensive (loss) income

     (2,870 )     1,112  

Accumulated deficit

     (4,749,855 )     (4,718,118 )
                

Total stockholders’ equity

     383,123       351,144  
                

Total liabilities and stockholders’ equity

   $ 622,988     $ 583,586  
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share data)

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2008     2007     2008     2007  

Revenues:

        

Subscription and maintenance

   $ 46,798     $ 34,219     $ 86,824     $ 68,238  

Services and other

     33,740       39,200       70,688       82,348  
                                

Total revenues

     80,538       73,419       157,512       150,586  
                                

Cost of revenues:

        

Subscription and maintenance

     10,454       8,195       19,322       16,044  

Services and other

     24,029       29,196       48,635       59,526  

Amortization of acquired technology and customer intangible assets

     4,685       3,734       8,194       7,430  
                                

Total cost of revenues

     39,168       41,125       76,151       83,000  
                                

Gross profit

     41,370       32,294       81,361       67,586  
                                

Operating expenses:

        

Sales and marketing

     29,432       23,096       54,544       46,072  

Research and development

     13,944       13,033       27,261       25,591  

General and administrative

     11,806       8,714       25,308       18,286  

Other income—Softbank

     —         (3,389 )     (566 )     (6,783 )

Amortization of other intangible assets

     210       124       319       324  

Restructuring and integration

     690       —         4,528       —    

Litigation provision

     —         —         5,900       —    
                                

Total operating expenses

     56,082       41,578       117,294       83,490  
                                

Loss from operations

     (14,712 )     (9,284 )     (35,933 )     (15,904 )

Interest and other income, net

     2,863       4,896       6,207       8,006  
                                

Net loss before income taxes

     (11,849 )     (4,388 )     (29,726 )     (7,898 )

Provision for income taxes

     549       684       992       1,261  
                                

Net loss

   $ (12,398 )   $ (5,072 )   $ (30,718 )   $ (9,159 )
                                

Net loss per share—basic and diluted

   $ (0.16 )   $ (0.07 )   $ (0.41 )   $ (0.13 )
                                

Weighted average shares—basic and diluted

     77,648       69,704       75,426       69,213  
                                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited; in thousands)

 

     Six Months Ended
March 31,
 
     2008     2007  

Operating activities:

    

Net loss

   $ (30,718 )   $ (9,159 )

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Recovery of doubtful accounts

     (57 )     (414 )

Depreciation

     3,868       3,401  

Amortization of intangible assets

     8,513       7,754  

Stock-based compensation

     21,318       18,047  

Realized gain—currency translation adjustment

     —         (2,200 )

Restructuring

     4,528       —    

Changes in operating assets and liabilities, net of effects of acquisitions:

    

Accounts receivable

     3,293       (377 )

Prepaid expenses and other assets

     5,281       (259 )

Accounts payable

     (985 )     (1,612 )

Accrued compensation and related liabilities

     (2,103 )     (3,264 )

Accrued liabilities

     (5,161 )     (2,486 )

Deferred revenue

     6,459       15,764  

Deferred income—Softbank

     (566 )     (6,783 )

Restructuring obligations

     (10,976 )     (11,371 )
                

Net cash provided by operating activities

     2,694       7,041  
                

Investing activities:

    

Cash paid for acquisition, net of cash acquired

     (55,475 )     —    

Purchases of property and equipment

     (2,682 )     (2,984 )

Sales of marketable securities, net of purchases

     65,648       (20,292 )

Allocation from restricted cash, net

     788       1,830  
                

Net cash provided by (used in) investing activities

     8,279       (21,446 )
                

Financing activities:

    

Proceeds from issuance of common stock

     2,900       3,956  

Repurchase of common stock

     (2,631 )     (2,241 )
                

Net cash provided by financing activities

     269       1,715  
                

Effect of foreign exchange rate changes on cash and cash equivalents

     (24 )     329  
                

Net change in cash and cash equivalents

     11,218       (12,361 )

Cash and cash equivalents at beginning of period

     61,311       51,997  
                

Cash and cash equivalents at end of period

   $ 72,529     $ 39,636  
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

ARIBA, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1—Description of Business and Summary of Significant Accounting Policies

Description of Business

Ariba, Inc., along with its subsidiaries (collectively referred to herein as the “Company”), is the leading provider of on-demand spend management solutions. The Company’s solutions combine on-demand software, category expertise and services to help companies automate the procurement process and drive best practice processes that lower costs, improve profits and increase competitive advantage. Ariba® Spend Management™ solutions are easy to use, cost effective and quick to deploy, integrate with enterprise resource planning and other software systems and can be used by companies of all sizes across industries worldwide. The Company was incorporated in Delaware in September 1996.

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year ending September 30, 2008. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted under the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K for the year ended September 30, 2007 filed on November 15, 2007 with the SEC. There have been no significant changes in new accounting pronouncements or in the Company’s critical accounting policies that were disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 other than the impact of the Company’s adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, which affected our Accounting for Income Taxes policy (see Note 5).

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported results of operations during the reporting period. Actual results could differ from those estimates. The items that are significantly impacted by estimates include revenue recognition, the assessment of recoverability of goodwill and other intangible assets, restructuring obligations related to abandoned operating leases, accounting for income taxes and contingencies related to the collectibility of accounts receivable and pending litigation.

Fair Value of Financial Instruments and Concentration of Credit Risk

The carrying value of the Company’s financial instruments, including cash and cash equivalents, investments, accounts receivable and accounts payable approximates fair value. Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments and trade accounts receivable. The Company maintains its cash, cash equivalents and investments with high quality financial institutions and limits its investment in individual securities based on the type and credit quality of each such security.

 

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The Company holds a variety of interest bearing auction rate securities (“ARS”) that represent investments in pools of assets, including student loans, commercial paper and credit derivative products. As of March 31, 2008, the Company holds $21.6 million of student loan securities that failed to settle in auctions commencing February 2008 and $4.9 million of commercial paper and credit derivative products that failed to settle in auctions commencing August 2007. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected all of the Company’s holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid and the Company will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Contractual maturity dates for these ARS investments range from 2016 to 2047. All of the ARS investments are investment grade quality and were in compliance with the Company’s investment policy at the time of acquisition. The Company currently has the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity. As of March 31, 2008, the Company reclassified the entire ARS investment balance from marketable securities to long-term investments on its condensed consolidated balance sheet because of our current inability to predict that these investments will be available for settlement within the next twelve months. The Company has also modified its current investment strategy and increased our investments in more liquid money market instruments.

Typically the fair value of ARS investments approximates par value due to the frequent resets through the auction process. While the Company continues to earn interest on its ARS investments at the contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value.

The Company has used a discounted cash flow model to determine the estimated fair value of its investment in ARS as of March 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of the ARS. Based on this assessment of fair value, as of March 31, 2008 the Company determined there was a decline in the fair value of its ARS investments of $4.5 million, all of which was deemed temporary.

The Company reviews its impairments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and related guidance issued by the FASB and SEC in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income (loss) component of stockholders’ equity. Such an unrealized loss does not affect net loss for the applicable accounting period. An other-than-temporary impairment charge is recorded as a realized loss in the condensed consolidated statement of operations and reduces net income (loss) for the applicable accounting period. In evaluating the impairment of each ARS, the Company classified such impairment as temporary. The differentiating factors between temporary and other-than-temporary impairment are primarily the length of the time and the extent to which the market value has been less than cost, the financial condition and near-term prospects of the issuer and our intent and ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in market value. If the issuers of the ARS are unable to successfully close future auctions or refinance their debt in the near term and/or the credit ratings of these instruments deteriorate, the Company may, in the future, conclude that an other-than-temporary impairment charge is required related to these investments. Such other-than-temporary impairment may be greater than the $4.5 million currently accounted for as a temporary decline.

The Company’s customer base consists of international businesses, and the Company performs ongoing credit evaluations of its customers and generally does not require collateral on accounts receivable. The Company maintains allowances for potential credit losses.

 

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No customer accounted for more than 10% of total revenues for the three and six months ended March 31, 2008 and 2007. In addition, no customer accounted for more than 10% of net accounts receivable as of March 31, 2008. One customer accounted for more than 10% of net accounts receivable as of September 30, 2007, the Company’s most recent fiscal year end.

New Accounting Standards

In September 2006, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the fiscal year beginning October 1, 2008. The Company is evaluating the impact of the provisions of SFAS No. 157 and will adopt this standard on October 1, 2008.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on an instrument-by-instrument basis. Subsequent measurements for the financial assets and liabilities an entity elects to record at fair value will be recognized in earnings. SFAS No. 159 also establishes additional disclosure requirements. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts SFAS No. 157. The Company is currently evaluating the impact of the provisions of SFAS No. 159 and will adopt this standard on October 1, 2008.

In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations. The standard changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. Statement 141(R) is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company will evaluate the impact the provisions of SFAS No. 141(R) and will adopt this standard on October 1, 2009.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51. The standard changes the accounting for noncontrolling (minority) interests in consolidated financial statements, including the requirements to classify noncontrolling interests as a component of consolidated stockholders’ equity and the elimination of “minority interest” accounting in results of operations with earnings attributable to noncontrolling interests reported as part of consolidated earnings. Additionally, SFAS No. 160 revises the accounting for both increases and decreases in a parent’s controlling ownership interest. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008, with early adoption prohibited. The Company will evaluate the impact the provisions of SFAS No. 160 and will adopt this standard on October 1, 2009.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities an amendment of FASB Statement No. 133. SFAS No. 161 requires disclosures of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008, with early adoption permitted. The Company will evaluate the impact the provisions of SFAS No. 161 and will adopt this standard on October 1, 2009.

Revenue Recognition

Substantially all of the Company’s revenues are derived from two sources: (i) providing software solutions on either a multi-tenant or single tenant basis and technical support and product updates, otherwise known as

 

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subscription and maintenance; and (ii) providing services, including implementation services, consulting services, training, education, premium support and other miscellaneous services. The significant majority of the Company’s standard end user license agreements provide for use of the Company’s software under a time-based license based on the number of users or other usage criteria. The Company licenses its software in multiple element arrangements in which the customer typically purchases a combination of some or all of the following: (i) software solutions, either on a standalone or on-demand basis; (ii) a maintenance arrangement, which is generally priced as a percentage of the software license fees and provides for technical support and unspecified product updates typically over a period of one year or over the term of the license; and (iii) a services arrangement, on either a fixed fee for access to specific services over time or a time and materials basis.

The Company licenses its products through its direct sales force and indirectly through resellers. Sales made through resellers are recognized at the time that the Company has received persuasive evidence of an end user customer. The license agreements for the Company’s products generally do not provide for a right of return, and historically product returns have not been significant. The Company does not recognize revenue for refundable fees or agreements with cancellation rights until such rights to refund or cancel have expired. Direct sales force commissions are accounted for as sales and marketing expense at the time of sale, when the liability is incurred and is reasonably estimable.

The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition, Emerging Issues Task Force (“EITF”) 00-21, Revenue Arrangements with Multiple Deliverables, EITF 00-3, Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware, and Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. The Company recognizes revenue when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery of the product or service has occurred; the fee is fixed or determinable; and collectibility is probable. If fees are not “fixed or determinable”, revenue is recognized when fees are due and payable. If collectibility is not considered probable at the inception of the arrangement, the Company does not recognize revenue until the fee is collected.

The Company allocates revenue to each element in a multiple element arrangement based on its respective fair value. The Company’s determination of the fair value of each element in a multiple element arrangement accounted for under SOP 97-2 is based on vendor-specific objective evidence (“VSOE”) of fair value, which is limited to the price when sold separately. VSOE or other methods of determining fair value that are allowable under EITF 00-21 are utilized for multiple element arrangements that are not subject to SOP 97-2.

Revenue from software solutions, hosting and sourcing solutions services is primarily recognized ratably over the term of the arrangement, commencing with the initial customer access date. Revenue allocated to maintenance and support is recognized ratably over the maintenance term (typically one year). Revenue allocated to software solutions implementation, process improvement, training and other services is recognized as the services are performed or as milestones are achieved or if bundled with a subscription or time-based arrangement or in circumstances where fair value cannot be established for undelivered service elements, is recognized, ratably over the term of the access agreement.

Certain of the Company’s contracts include performance incentive payments based on market volume and/or savings generated, as defined in the respective contracts. Revenue from such arrangements is recognized when those thresholds are achieved.

When revenue associated with multiple element arrangements is recognized and more than one element in an arrangement does not have fair value, the Company first allocates revenue on the statement of operations to those elements for which evidence of fair value is available.

In circumstances where the Company provides consulting services as part of a multi-element arrangement with software solutions, both the software solution revenue and service revenue are recognized under the lesser of proportional performance method based on hours or ratable over the term of the license.

 

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Deferred revenue includes amounts received from customers for which revenue has not been recognized, and generally results from deferred subscription, maintenance and support, hosting, consulting or training services not yet rendered and recognizable under EITF 00-21 and license revenue deferred until all requirements of SOP 97-2 are met. Deferred revenue is recognized as revenue upon delivery of the Company’s product, as services are rendered, or as other requirements under SAB 104, EITF 00-21 or SOP 97-2 are satisfied. Deferred revenue excludes contract amounts for which payment has yet to be collected. Likewise, accounts receivable excludes amounts due from customers for which revenue has been deferred.

Stock-Based Compensation

The Company maintains stock plans which allow for the issuance of stock options and restricted common stock to executives and certain employees. The Company also maintains an employee stock purchase plan (“ESPP”) that provides for the issuance of shares to all eligible employees of the Company at a discounted price.

The Company follows the fair value recognition provisions of SFAS No. 123R, Share-Based Payment. This statement applies to all awards granted after the effective date and to modifications, repurchases or cancellations of existing awards. Additionally, under the modified prospective transition method of adoption, the Company recognizes compensation expense for the portion of outstanding awards on the adoption date for which the requisite service period has not yet been rendered based on the grant-date fair value of those awards calculated under SFAS No. 123 and SFAS No. 148. The Company amortizes the fair value of awards granted on an accelerated basis. SFAS No. 123R requires the Company to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records share-based compensation expense only for those awards that are expected to vest.

During the six months ended March 31, 2007, the Company accelerated approximately 259,000 unvested stock options, which resulted in approximately $1.0 million of compensation cost. During the three months ended March 31, 2008 and 2007, the Company recorded $150,000 and $334,000, respectively, of stock-based compensation expense associated with employee and director stock options and employee stock purchase plan programs. During the six months ended March 31, 2008 and 2007, the Company recorded $326,000 and $2.1 million, respectively, of stock-based compensation expense associated with employee and director stock options and employee stock purchase plan programs.

During the three and six months ended March 31, 2008, the Company granted 633,000 and 2.0 million shares, respectively, of restricted common stock to executive officers and certain employees with a fair value of $6.0 million and $22.5 million, respectively. These amounts are being amortized in accordance with SFAS No. 123R over the vesting period of the individual restricted common stock grants, which are two to three years.

During the six months ended March 31, 2008, the Company also granted 1.0 million shares of restricted common stock to executive officers and certain key employees with a fair value of $12.2 million, whose vesting and the number of shares are contingent upon meeting performance milestones related to subscription software revenues for the year ended September 30, 2008 and upon subsequent service periods. The number of shares that will vest upon meeting the performance milestones and subsequent service periods is up to 200%, or 2.1 million shares with a fair value of $24.4 million. The shares vest one-third upon the achievement of the performance milestone, one-third upon service on the first anniversary of achievement of the performance milestone and one-third upon service on the second anniversary of achievement of the performance milestone. Current assumptions are that the performance milestone will be met at 200% and compensation expense is recorded based upon the fair value based on the closing price on the date of grant over the vesting period, or three years. The Company will evaluate this assumption on a quarterly basis for the year ended September 30, 2008. If the performance milestone is not achieved and the shares fail to vest, any previously recognized compensation cost will be reversed.

 

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During the three and six months ended March 31, 2007 and 2006, the Company granted 1.5 million and 1.6 million shares, respectively, of restricted common stock to certain employees with a fair value of $13.2 million and $14.3 million, respectively. These amounts are being amortized in accordance with SFAS No. 123R, over the vesting period of the individual restricted common stock grants, which is three years.

During the six months ended March 31, 2007, the Company also granted 980,000 shares of restricted common stock to executive officers and certain key employees with a fair value of $7.5 million whose vesting is contingent upon meeting a performance milestone related to subscription software revenues and is being amortized over the performance period. The fair value of each restricted share granted was calculated based on the closing stock price on the date of grant and based on the assumption that the performance objective milestone will be achieved. In the three months ended March 31, 2008, the performance milestone was achieved which was consistent with the Company’s assumptions.

During the three months ended March 31, 2008 and 2007, the Company recorded $10.7 million and $7.4 million, respectively, of stock-based compensation expense associated with restricted stock grants. During the six months ended March 31, 2008 and 2007, the Company recorded $19.6 million and $14.6 million, respectively, of stock-based compensation expense associated with restricted stock grants. As of March 31, 2008, there was $45.3 million of unrecognized compensation cost related to non-vested restricted share-based compensation arrangements which is expected to be recognized over a weighted-average period of 0.9 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

The Company also made a contribution to the Ariba, Inc. Employees 401(k) Savings Plan in the form of common stock with a value of $657,000 and $596,000 in the three months ended March 31, 2008 and 2007, respectively, and of $1.4 million and $1.3 million in the six months ended March 31, 2008 and 2007, respectively.

Total stock-based compensation of $11.5 million and $8.4 million was recorded in the three months ended March 31, 2008 and 2007, respectively, and $21.3 million and $18.0 million was recorded in the six months ended March 31, 2008 and 2007, respectively, to various operating expense categories as follows (in thousands):

 

     Three Months Ended
March 31,
   Six Months Ended
March 31,
     2008    2007    2008    2007

Cost of revenues—subscription and maintenance

   $ 628    $ 484    $ 1,125    $ 1,047

Cost of revenues—services and other

     1,628      1,823      3,245      3,947

Sales and marketing

     4,455      2,747      8,238      6,107

Research and development

     1,832      1,289      3,073      2,701

General and administrative

     2,946      2,018      5,637      4,245
                           

Total

   $ 11,489    $ 8,361    $ 21,318    $ 18,047
                           

Note 2—Business Combination

On December 17, 2007, the Company acquired Procuri, Inc. (“Procuri”), a privately held company headquartered in Atlanta, Georgia, to expand its on-demand supply management solutions. The Company has included the financial results of Procuri in its condensed consolidated financial results effective December 17, 2007. The total purchase price for Procuri was $103.2 million which consisted of $55.6 million in cash paid to acquire the outstanding common stock of Procuri and payoff Procuri’s outstanding debt, $46.1 million of the Company’s common stock (based on the issuance of 4.1 million shares of Ariba common stock) and $1.5 million for transaction costs. Of the amounts above, in the three months ended March 31, 2008, the Company paid $535,000 in cash and issued $574,000 of common stock (based on the issuance of 50,509 shares) based on a working capital calculation of Procuri as of December 17, 2007. For the purposes of the purchase price calculation, the deemed fair value of the Ariba common stock issued in the merger was $11.36 per share, which

 

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is equal to Ariba’s average closing price per share as reported on the Nasdaq Global Market for each trading day during the period beginning two days before the acquisition date and the acquisition date of December 17, 2007. $9.2 million of cash is being held in escrow by a third-party escrow agent for indemnification claims. The escrow shall be released eighteen months after the closing of the merger. There is an additional indemnification obligation of $7.0 million by the stockholders of Procuri outside the escrow that shall expire thirty months after the closing of the merger with respect to certain intellectual property and tax representations. In allocating the purchase price based on estimated fair values, the Company has preliminarily recorded $80.2 million of goodwill, $28.5 million of identifiable intangible assets and $5.5 million of net tangible liabilities. Due to the timing of the Procuri acquisition, the Company is still in the process of finalizing the valuation of the acquired assets and liabilities, and therefore the purchase price allocation is preliminary and subject to change once finalized. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of non-income based taxes and accounts receivable.

None of the goodwill resulting from the acquisition of Procuri is expected to be deductible for tax purposes. Identified intangible assets associated with the acquisition of Procuri will be amortized to cost of revenues and operating expense based upon the nature of the asset ratably over the estimated period of benefit of up to six years as detailed in the table below. The estimated period of benefit is determined based upon the estimated period of positive cash flows being generated by the asset. Identifiable intangible assets consist of:

 

Identified Intangible Assets

   Fair Value
(in thousands)
   Estimated
Useful Life
(years)
   Estimated
Annual
Amortization
(in thousands)
   Statements of
Operations
Classification

Existing technology

   $ 2,900    2    $ 1,450    Cost of revenue

Customer contracts and related customer relationship

     24,600    6    $ 4,100    Cost of revenue

Trade name / trademarks

     400    2    $ 200    Operating expense

Non-competition agreements

     600    2    $ 300    Operating expense
               
   $ 28,500         
               

The following unaudited pro forma financial information is presented to reflect the results of operations for the three and six months ended March 31, 2008 and 2007 as if the acquisition of Procuri had occurred on October 1, 2007 and 2006, respectively. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what operating results would have been had the acquisition actually taken place on October 1, 2007 and 2006, respectively, and may not be indicative of future operating results (in thousands, except per share amounts):

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2008     2007     2008     2007  

Revenues

   $ 80,538     $ 77,319     $ 161,534     $ 158,635  

Net loss

   $ (12,398 )   $ (10,675 )   $ (35,441 )   $ (20,611 )

Net loss per share—basic and diluted

   $ (0.16 )   $ (0.14 )   $ (0.45 )   $ (0.28 )

Weighted average shares—basic and diluted

     77,648       73,764       78,827       73,274  

 

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Note 3—Goodwill and Other Intangible Assets

The table below reflects changes or activity in the balances related to goodwill for the six months ended March 31, 2008 (in thousands):

 

     Net
carrying
amount

Goodwill balance as of October 1, 2007

   $ 326,101

Goodwill related to Procuri

     80,220
      

Goodwill balance as of March 31, 2008

   $ 406,321

The table below reflects changes or activity in the balances related to other intangible assets for the three months ended March 31, 2008 (in thousands):

 

    Useful Life   March 31, 2008   September 30, 2007
      Gross
carrying
amount
  Accumulated
amortization
    Net
carrying
amount
  Gross
carrying
amount
  Accumulated
amortization
    Net
carrying
amount

Other Intangible Assets

             

Existing software technology

  24 months   $ 13,300   $ (10,823 )   $ 2,477   $ 10,400   $ (10,400 )   $ —  

Contracts and related customer relationships

  48 to 72 months     78,887     (52,195 )     26,692     54,287     (44,421 )     9,866

Trade names/trademarks

  24 to 60 months     2,200     (1,433 )     767     1,800     (1,205 )     595

Non-competition agreements

  24 months     600     (88 )     513     —       —         —  
                                         

Total

    $ 93,787   $ (64,539 )   $ 30,448   $ 66,487   $ (56,026 )   $ 10,461
                                         

Amortization of other intangible assets for the three and six months ended March 31, 2008 totaled $4.9 million and $8.5 million, respectively. Of the total, amortization of $4.7 million and $8.2 million related to contracts and related customer relationships and existing software technology was recorded as cost of revenues in the three and six months ended March 31, 2008, respectively. Amortization of $210,000 and $319,000 primarily related to trade names/trademarks and non-competition agreements were recorded as operating expense in the three and six months ended March 31, 2008, respectively.

Amortization of other intangible assets for the three and six months ended March 31, 2007 totaled $3.9 million and $7.8 million, respectively. Of the total, amortization of $3.7 million and $7.4 million related to contracts and related customer relationships and existing software technology was recorded as cost of revenues in the three and six months ended March 31, 2007, respectively. Amortization of $124,000 and $324,000 related to trade names/trademarks and other contracts and related customer relationships were recorded as operating expense in the three and six months ended March 31, 2007, respectively.

As of March 31, 2008, estimated future amortization expense related to intangible assets is $6.5 million for the remainder of fiscal year 2008, $6.3 million in fiscal year 2009, $4.5 million in fiscal year 2010, $4.1 million in fiscal year 2011, $4.1 million in fiscal year 2012, $4.1 million in fiscal year 2013 and $854,000 thereafter.

Note 4—Commitments and Contingencies

Leases

In March 2000, the Company entered into a facility lease agreement for approximately 716,000 square feet in four office buildings and an amenities building in Sunnyvale, California for its headquarters. The operating

 

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lease term commenced in January 2001 through April 2001 and ends in January 2013. The Company occupies approximately 182,000 square feet in this facility. The Company currently subleases two buildings, totaling 352,000 square feet, to third parties. These subleases expire in January 2013. The remaining 182,000 square feet is available for sublease. Minimum monthly lease payments are approximately $3.2 million and escalate annually, with the total future minimum lease payments amounting to $204.0 million over the remaining lease term. As part of this lease agreement, the Company is required to issue standby letters of credit backed by cash equivalents, totaling $29.2 million as of March 31, 2008, as a form of security through fiscal year 2013. Also, the Company is required by other lease agreements to hold an additional $675,000 of standby letters of credit, which are cash collateralized. These instruments are issued by its banks in lieu of a cash security deposit required by landlords for domestic and international real estate leases. The total cash collateral of $29.9 million is classified as restricted cash on the Company’s condensed consolidated balance sheet as of March 31, 2008.

The Company also occupies 91,000 square feet of office space in Pittsburgh, Pennsylvania under a lease that expires in December 2017. This location consists principally of the Company’s services organization and administrative activities.

The Company leases certain equipment, software and its facilities under various noncancelable operating and immaterial capital leases with various expiration dates through 2017. Rental expense was $6.6 million and $8.1 million for the three months ended March 31, 2008 and 2007, respectively, and $12.6 million and $16.3 million for the six months ended March 31, 2008 and 2007, respectively. This expense was reduced by sublease income of $2.3 million and $4.0 million for the three months ended March 31, 2008 and 2007, respectively, and $4.2 million and $8.0 million for the six months ended March 31, 2008 and 2007, respectively. The following table summarizes future minimum lease payments and sublease income under noncancelable operating leases as of March 31, 2008 (in thousands):

 

Year Ending September 30,

   Lease
Payments
   Contractual
Sublease
Income

2008

   $ 23,237    $ 4,768

2009

     46,204      10,552

2010

     46,693      11,278

2011

     47,524      11,927

2012

     49,414      12,601

Thereafter

     29,706      4,116
             

Total

   $ 242,778    $ 55,242
             

Of the total operating lease commitments noted above, $90.7 million is for occupied properties and $152.1 million is for abandoned properties, which are a component of the restructuring obligation.

 

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Restructuring and integration costs

The following table details accrued restructuring and integration obligations and related activity through March 31, 2008 (in thousands):

 

    Severance
and
benefits
    Lease
abandonment
costs
    Asset
impairment
    Total
restructuring and
integration
costs
 

Accrued restructuring obligations as of October 1, 2006

  $ 42     $ 95,252     $ —       $ 95,294  

Cash paid

    (42 )     (18,986 )     —         (19,028 )

Total charge to operating expense

    —         (4,194 )     —         (4,194 )

Reclassification to deferred rent obligation

    —         (901 )     —         (901 )
                               

Accrued restructuring obligations as of September 30, 2007

    —         71,171       —         71,171  

Cash paid

    (2,101 )     (7,896 )     —         (9,997 )

Total charge to operating expense

    1,086       3,056       386       4,528  

Asset impairment applied to asset balances

    —         —         (386 )     (386 )

Restructuring obligation assumed under purchase acquisition

    2,093       623       —         2,716  
                               

Accrued restructuring obligations as of March 31, 2008

  $ 1,078     $ 66,954     $ —         68,032  
                         

Less: current portion

          20,638  
             

Accrued restructuring obligations, less current portion

        $ 47,394  
             

Severance and benefits costs

Severance and benefits costs primarily include involuntary termination and health benefits, outplacement costs and payroll taxes for terminated personnel. The Company recorded a charge of $708,000 and $1.1 million related to severance benefit costs in connection with its acquisition of Procuri for the three and six months ended March 31, 2008, respectively. In addition, the Company assumed liabilities related to the severance of former Procuri employees of $2.1 million.

Lease abandonment and leasehold impairment costs

Lease abandonment costs incurred to date relate primarily to the abandonment of leased facilities in Sunnyvale, California and Pittsburgh, Pennsylvania. In March 2008, the Company entered into an amendment with Motorola, Inc. (“Motorola”) to the sublease dated as of August 24, 2004 between the Company and Motorola. Pursuant to the amendment, Motorola agreed to renew its sublease of approximately 88,000 square feet of space at the Company’s Sunnyvale, California headquarters through January 2013. Also in March 2008, the Company revised its estimates for sublease commencement dates to reflect current market conditions primarily in the Northern California real estate market. The impact of the execution of the amendment to the sublease agreement with Motorola was a benefit to operations of approximately $1.7 million and the impact of the revised estimated sub-lease commencement dates was a charge to operations of $1.7 million, resulting in a net benefit to operations of $18,000 in the three months ended March 31, 2008.

Also in the six months ended March 31, 2008, the Company evaluated its office space in Sunnyvale, California, and ceased use of approximately 31,500 square feet of space in its corporate headquarters. In accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, and SFAS No. 144, the Company recorded lease abandonment costs of $3.1 million and leasehold impairments of $386,000 in the six months ended March 31, 2008. Also during the six months ended March 31, 2008, due to the planned abandonment of an additional facility as a result of the Company’s acquisition of Procuri, the Company recorded an adjustment of $623,000 to the restructuring obligation in accordance with EITF 95-3, Recognition of

 

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Liabilities in Connection with a Purchase Business Combination. This restructuring cost was considered part of the preliminary purchase accounting for Procuri. Total lease abandonment costs include lease liabilities offset by estimated sublease income, and were based on market trend information analyses. As of March 31, 2008, $67.0 million of lease abandonment costs remain accrued and are expected to be paid by fiscal year 2013.

The Company’s lease abandonment accrual is net of $74.5 million of estimated sublease income. Actual sublease payments due under noncancelable subleases of excess facilities totaled $55.2 million as of March 31, 2008, and the remainder of anticipated sublease income represents management’s best estimates of amounts to be received under future subleases. Actual future cash requirements and lease abandonment costs may differ materially from the accrual at March 31, 2008, particularly if actual sublease income is significantly different from current estimates. These differences could have a material adverse effect on the Company’s operating results and cash position. For example, a reduction in assumed market lease rates of $0.25 per square foot per month for the remaining term of the lease, with all other assumptions remaining the same, would increase the estimated lease abandonment loss on the Company’s Sunnyvale, California headquarters by approximately $1.9 million as of March 31, 2008.

Other arrangements

Other than the obligations identified above, the Company does not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. The Company has no other off-balance sheet arrangements or transactions with unconsolidated limited purpose entities, nor does it have any undisclosed material transactions or commitments involving related persons or entities. The Company does not have any material noncancelable purchase commitments as of March 31, 2008.

Litigation

IPO Class Action Litigation

In 2001, a number of purported shareholder class action complaints related to the Company’s and FreeMarkets’ initial public offerings (the “IPOs”) were filed in the United States District Court for the Southern District of New York against the Company and FreeMarkets, Inc. (“FreeMarkets”), certain of the two companies’ former officers and directors, and the underwriters who handled the IPOs. These complaints were later consolidated into single class action proceedings related to each IPO. Those consolidated complaints were then further consolidated, along with similar complaints filed against over 300 other issuers in connection with their initial public offerings, before a single judge for case management purposes In June 2003, a proposed settlement was reached between plaintiffs and the Company and FreeMarkets (the individual defendants having been previously dismissed). The Company merged with FreeMarkets in July 2004. On December 5, 2006, the Court of Appeals granted the underwriter defendants’ appeal of the District Court’s order granting class certification in six focus cases. On June 25, 2007, in light of the Court of Appeals’ decision, and based on a stipulation among the parties to the settlement, the District Court entered an order terminating the proposed settlement. On August 14, 2007, the plaintiffs filed amended complaints in the focus cases, seeking to address the deficiencies raised in the Court of Appeals’ opinion. On September 27, 2007, plaintiffs moved to certify the classes in those focus cases. On December 28, 2007, the underwriters filed a motion to strike the class allegations in the amended complaints, which the issuers in the focus cases later joined. On March 26, 2008, the District Court denied in part the defendants’ motions to dismiss the amended complaints in the focus cases, while dismissing those proposed class plaintiffs who sold their securities of the relevant issuers for a price in excess of the initial offering price or purchased their securities outside the certified class period. The parties are currently discussing further discovery that the plaintiffs seek from the underwriters and the issuers. As of March 31, 2008, no amount is accrued as a loss is not considered probable or estimable.

Patent Litigation with Emptoris, Inc.

On April 19, 2007, the Company sued Emptoris, Inc. (“Emptoris”) in the United States District Court for the Eastern District of Texas for patent infringement. We are seeking an award of damages, enhancement of those

 

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damages, an attorneys fee award and an injunction against further infringement of the patents in suit. Emptoris has denied that it has infringed our patents in suit and alleges that our patents are not valid or enforceable. The Court has set the trial in that matter to commence in October 2008. On November 20, 2007, Emptoris sued the Company for infringement of one of its patents in the same Texas court where the Company’s patent claims are pending. Emptoris seeks an award of damages against the Company, an attorneys fee award and an injunction against further infringement. The Court has set the trial in that matter to commence in June 2009. As of March 31, 2008, no amount is accrued as a loss is not considered probable or estimable.

General

Defending against these actions and various other claims and legal actions arising in the ordinary course of business may require significant management time and, regardless of the outcome, result in significant legal expenses. If the Company’s defenses are unsuccessful or if it is unable to settle on favorable terms, the Company could be liable for a large damages award and, in the case of patent litigation, be subject to an injunction that could seriously harm its business and results of operations. For instance, in the three months ended March 31, 2008, the Company paid $5.9 million to settle a patent infringement matter brought by Sky Technologies LLC (“Sky”) against the Company and $2.0 million was paid by Procuri to settle a separate patent infringement matter brought against it by Sky.

Indemnification

The Company sells software licenses, access to its on-demand offerings and/or services to its customers under contracts that the Company refers to as Terms of Purchase or Software License and Service Agreements (collectively, “SLSA”). Each SLSA contains the relevant terms of the contractual arrangement with the customer, and generally includes certain provisions for indemnifying the customer against losses, expenses and liabilities from damages that may be incurred by or awarded against the customer in the event the Company’s software or services are found to infringe upon a patent, copyright, trade secret, trademark or other proprietary right of a third party. The SLSA generally limits the scope of remedies for such indemnification obligations in a variety of industry-standard respects, including but not limited to certain product usage limitations and geography-based scope limitations, and a right to replace an infringing product or service or modify them to make them non-infringing. If the Company cannot address the infringement by replacing the product or service, or modifying the product or service, the Company is allowed to cancel the license or service and return certain of the fees paid by the customer.

To date, the Company has not had to reimburse any of its customers for any losses related to these indemnification provisions and no material customer claims for such indemnification are outstanding as of March 31, 2008.

Note 5—Income Taxes

On October 1, 2007, the Company adopted FIN 48. FIN 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon effective settlement.

The total amount of gross unrecognized tax benefits as of October 1, 2007 (the date of adoption of FIN 48) was $6.0 million including interest and penalties. The adoption of FIN 48 resulted in an increase to the Company’s retained deficit of $1.0 million. In addition, as of the date of adoption, approximately $4.4 million of unrecognized benefits would affect the Company’s effective tax rate if realized. The Company recognizes interest and penalties related to uncertain tax positions in the Company’s provision for income taxes line of the

 

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Company’s consolidated statements of operations and the gross amount of interest and penalties accrued as of the date of adoption was $1.5 million. The Company also reclassified $6.0 million of certain short-term tax liabilities to long-term as of October 1, 2007 as a result of the adoption of FIN 48.

As of March 31, 2008, due to expiring statutes of limitation, the company’s unrecognized tax benefits will decrease in the next 12 months by approximately $3.5 million. Although the Company has numerous tax audits in progress globally which could affect its unrecognized tax benefits, at this time the Company cannot reasonably predict the outcomes of those audits or the impacts on our unrecognized tax benefits. The Company’s U.S. federal income tax return is open to examination for the fiscal year ended September 30, 2004 and forward. Globally, the Company’s income tax returns are open to examination among various jurisdictions ranging from fiscal year ended September 30, 2001 forward.

The Company believes that it has adequately provided for any reasonably foreseeable outcomes related to the Company’s tax audits. However, there can be no assurances as to the possible outcomes.

Note 6—Stockholders’ Equity

Stock-Based Compensation Plans

A summary of the activity related to the Company’s restricted common stock is presented below for the six months ended March 31, 2008:

 

     Six Months Ended
March 31, 2008
     Number of
Shares
    Weighted-
Average
Fair
Value

Nonvested at beginning of period

   6,396,580     $ 8.33

Granted

   3,065,983     $ 11.31

Vested

   (1,606,735 )   $ 9.83

Forfeited

   (577,083 )   $ 9.26
        

Nonvested at end of period

   7,278,745     $ 9.16
        

The fair value of stock awards vested was $8.7 million and $6.6 million for the three months ended March 31, 2008 and 2007, respectively, and $16.3 million and $14.1 million for the six months ended March 31, 2008 and 2007, respectively.

A summary of the activity related to the Company’s stock options is presented below:

 

     Six Months Ended
March 31, 2008
     Number of
Options
    Weighted-
Average
Exercise
Price
   Aggregate
Intrinsic
Value

Outstanding at beginning of period

   1,273,285     $ 12.76   

Granted

   —       $ —     

Exercised

   (194,488 )   $ 4.64   

Forfeited

   (37,646 )   $ 31.59   
           

Outstanding at end of period

   1,041,151     $ 13.57    $ 1,842,000
           

Exercisable at end of period

   1,041,151     $ 13.57    $ 1,842,000
           

 

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The total intrinsic value of options exercised during the three months ended March 31, 2008 and 2007 was $311,000 and $948,000, respectively, and $1.2 million and $1.5 million during the six months ended March 31, 2008 and 2007, respectively. The aggregate intrinsic value represents the total pretax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the second quarter of fiscal 2008 and the exercise price, multiplied by the number of shares subject to in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2008. This amount changes based on the fair market value of the Company’s stock.

Comprehensive Loss

SFAS No. 130, Reporting Comprehensive Income, establishes standards of reporting and display of comprehensive income and its components of net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that are not included in net income but rather are recorded directly in stockholders’ equity. The components of comprehensive loss for the three and six months ended March 31, 2008 and 2007 are as follows (in thousands):

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2008     2007     2008     2007  

Net loss

   $ (12,398 )   $ (5,072 )   $ (30,718 )   $ (9,159 )

Unrealized (loss) gain on securities

     (3,637 )     4       (3,960 )     —    

Foreign currency translation adjustments

     180       120       (22 )     330  
                                

Comprehensive loss

   $ (15,855 )   $ (4,948 )   $ (34,700 )   $ (8,829 )
                                

The income tax effects related to unrealized gains and losses on securities and foreign currency translation adjustments are not material.

The components of accumulated other comprehensive (loss) income as of March 31, 2008 and September 30, 2007 are as follows (in thousands):

 

     March 31,
2008
    September 30,
2007
 

Unrealized loss on securities

   $ (4,470 )   $ (510 )

Foreign currency translation adjustments

     1,600       1,622  
                

Accumulated other comprehensive (loss) income

   $ (2,870 )   $ 1,112  
                

Note 7—Net Loss Per Share

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2008     2007     2008     2007  

Net loss

   $ (12,398 )   $ (5,072 )   $ (30,718 )   $ (9,159 )
                                

Weighted-average common shares outstanding

     86,189       77,320       83,882       76,761  

Less: Weighted-average common shares subject to repurchase

     (8,541 )     (7,616 )     (8,456 )     (7,548 )
                                

Weighted-average common shares—basic and diluted

     77,648       69,704       75,426       69,213  
                                

Net loss per common share—basic and diluted

   $ (0.16 )   $ (0.07 )   $ (0.41 )   $ (0.13 )
                                

 

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Note 8—Segment Information

The Company follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision makers in deciding how to allocate resources and in assessing performance.

The Company has three geographic operating segments: North America, Europe Middle-East and Africa (“EMEA”) and Asia-Pacific (“APAC”). The segments are determined in accordance with how management views and evaluates the Company’s business and based on the aggregation criteria as outlined in SFAS No. 131. Future changes to this organizational structure or the business may result in changes to the reportable segments disclosed. The Company markets its products in the United States and in foreign countries through its direct sales force and indirect sales channels.

The results of the reportable segments are derived directly from the Company’s management reporting system. The results are based on the Company’s method of internal reporting and are not necessarily in conformity with accounting principles generally accepted in the United States. Management measures the performance of each segment based on several metrics, including contribution margin. Asset data is not reviewed by management at the segment level.

Segment contribution margin includes all geographic segment revenues less the related cost of sales, direct sales and marketing expenses and regional general and administrative expenses. A significant portion of each segment’s expenses arise from shared services and infrastructure that the Company has historically allocated to the segments in order to realize economies of scale and to use resources efficiently. These expenses include information technology services, facilities and other infrastructure costs and are generally allocated based upon headcount.

Financial information for each reportable segment was as follows for the three and six months ended March 31, 2008 and 2007 (in thousands):

 

     Three Months Ended
March 31,
   Six Months Ended
March 31,
     2008    2007    2008    2007

Revenue

           

—North America

   $ 49,901    $ 46,777    $ 94,427    $ 93,237

—EMEA

     18,008      14,385      36,899      32,769

—APAC

     5,541      5,506      11,494      10,841

—Corporate revenue

     7,088      6,751      14,692      13,739
                           

Total revenue

   $ 80,538    $ 73,419    $ 157,512    $ 150,586
                           

Revenues are attributed to countries based on the location of the Company’s customers, with some internal reallocation for multi-national customers. Certain revenue items are not allocated to segments because they are separately managed at the corporate level. These items include Ariba Managed Procurement Services, expense reimbursement and other miscellaneous items.

 

     Three Months Ended
March 31,
   Six Months Ended
March 31,
     2008     2007    2008    2007

Contribution margin

          

—North America

   $ 21,489     $ 18,216    $ 40,138    $ 37,824

—EMEA

     5,044       2,537      11,534      9,377

—APAC

     (445 )     84      103      530
                            

Contribution margin

   $ 26,088     $ 20,837    $ 51,775    $ 47,731
                            

 

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Contribution margin is used, in part, to evaluate the performance of, and allocate resources to, each of the segments. Certain operating expenses are not allocated to segments because they are separately managed at the corporate level. These unallocated costs include marketing costs other than direct sales and marketing, research and development costs, corporate general and administrative costs, such as legal and accounting, amortization of purchased intangibles, other income—Softbank, restructuring and integration costs, litigation provision, interest and other income, net and provision for income taxes.

The reconciliation of segment information to the Company’s net loss before income taxes was as follows for the three and six months ended March 31, 2008 and 2007 (in thousands):

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2008     2007     2008     2007  

Segment contribution margin

   $ 26,088     $ 20,837     $ 51,775     $ 47,731  

Corporate revenue

     7,088       6,751       14,692       13,739  

Corporate costs, such as research and development, corporate general and administrative and other

     (42,303 )     (36,403 )     (84,025 )     (76,403 )

Amortization of acquired technology and customer intangible assets

     (4,685 )     (3,734 )     (8,194 )     (7,430 )

Other income—Softbank

     —         3,389       566       6,783  

Amortization of other intangibles

     (210 )     (124 )     (319 )     (324 )

Restructuring and integration

     (690 )     —         (4,528 )     —    

Litigation provision

     —         —         (5,900 )     —    

Interest and other income, net

     2,863       4,896       6,207       8,006  
                                

Loss before income taxes

   $ (11,849 )   $ (4,388 )   $ (29,726 )   $ (7,898 )
                                

Subscription revenues consist mainly of fees for software access subscription and hosted software services. Maintenance revenues consist primarily of Ariba Buyer and Ariba Sourcing product maintenance fees. Services and other revenues consist of fees for implementation services, consulting services, managed services, training, education, premium support, fees charged for the use of the Company’s software under perpetual agreements and other miscellaneous items. Revenues by similar product and service groups are as follows (in thousands):

 

     Three Months Ended
March 31,
   Six Months Ended
March 31,
     2008    2007    2008    2007

Subscription revenues

   $ 28,569    $ 15,652    $ 49,400    $ 30,831

Maintenance revenues

     18,229      18,567      37,424      37,407

Services and other revenues

     33,740      39,200      70,688      82,348
                           

Total

   $ 80,538    $ 73,419    $ 157,512    $ 150,586
                           

Information regarding long-lived assets in geographic areas are as follows (in thousands):

 

     March 31,
2008
   September 30,
2007

Long-Lived Assets:

     

United States

   $ 17,668    $ 17,756

International

     2,240      2,474
             

Total

   $ 19,908    $ 20,230
             

 

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Note 9—Other Income—Softbank

In June 2003, the Company commenced an arbitration proceeding against Softbank for failing to meet its contractual revenue commitments. In October 2004, the Company entered into a definitive agreement with Softbank settling their dispute. A total of $37.0 million was recorded as “Deferred income—Softbank” in connection with the settlement. As the Company was unable to determine the respective fair value of the amounts that related to Softbank’s software license, related maintenance and the Company’s prior agreements with Softbank, the $37.0 million was recognized ratably as “Other income—Softbank” over the three-year software license term ended October 2007. The Company recorded $0 and $3.4 million in income related to the Softbank agreement in the three months ended March 31, 2008 and 2007 and $566,000 and $6.8 million in the six months ended March 31, 2008 and 2007. As of March 31, 2008, there is $0 of deferred income related to the Softbank settlement.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. For example, words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”, “intends”, and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in any forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed under the heading “Risk Factors” in Part II of this Form 10-Q and the risks discussed in our other Securities and Exchange Commission (“SEC”) filings.

Overview of Our Business

Ariba is the leading provider of on-demand spend management solutions. Our solutions combine on-demand software, category expertise and services to help companies automate the procurement process and drive best practice processes that lower costs, improve profits and increase competitive advantage. Ariba® Spend Management™ solutions are easy to use, cost effective and quick to deploy, integrate with ERP and other software systems and can be used by companies of all sizes across industries worldwide. On December 17, 2007, we acquired Procuri to further enhance our on-demand product offerings and expand our direct sales force in the mid-market area.

Our software is built to leverage the Internet and provide enterprises with real-time access to their business data and their business partners. Our software is designed to integrate with all major platforms and can be accessed via a web browser. Our software can be deployed as an installed application or provided as a service in an on-demand model. In addition to application software, Ariba Spend Management solutions include implementation and strategic consulting services, education and training, commodity expertise and decision support services, benchmarking services, low-cost country sourcing services and procurement outsourcing services. Ariba Spend Management solutions also integrate with and leverage the Ariba Supplier Network. The Ariba Supplier Network is a scalable Internet infrastructure that connects our buying organizations with their suppliers to exchange product and service information as well as a broad range of business documents, such as purchase orders and invoices. Over 168,000 registered suppliers, offering a wide array of goods and services, are connected to the Ariba Supplier Network.

Ariba Spend Management solutions are organized around six key functions: (1) spend visibility; (2) sourcing; (3) contract management; (4) procurement and expense; (5) invoice and payment; and (6) supplier management. Through our solution offerings, we help customers develop a strategy for spend management and enable a step-by-step approach with technology and services that work together.

Business Model

Ariba Spend Management solutions are delivered in a flexible manner, depending upon the needs and preferences of the customer. For customers seeking self sufficiency, we offer flexible, highly configurable and easy-to-use technology and related services that can be deployed behind the firewall or delivered as an on-demand service. For customers seeking expert assistance, we offer sourcing process and commodity expertise in over 400 categories of spend.

We have aligned our business model with the way we believe customers want to purchase and deploy spend management solutions. Customers may generally subscribe to our software products and services for a specified term, purchase a perpetual software license and/or pay for services on a time-and-materials or milestone basis, depending upon their business requirements. Our revenue is comprised of subscription and maintenance fees, and services and other fees. Subscription and maintenance revenue consists of fees charged for hosted on-demand

 

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software solutions and fees for product updates and support, as well as fees paid by suppliers for access to the Ariba Supplier Network. Services and other revenue consists of fees for implementation services, consulting services, managed services, training, education, premium support, license fees charged for the use of our software products under perpetual agreements and other miscellaneous items.

Due to the different treatment of our revenue streams under applicable accounting guidance, each type of revenue has a different impact on our consolidated financial statements. Subscription fees for hosted on-demand software solutions are generally fixed for a specific period of time, and revenue is recognized ratably over the term. Therefore, a subscription license will result in significantly lower current-period revenue than an equal-sized perpetual license, but with revenue recognized in future periods. Similarly, maintenance fees are generally fixed for a specific period of time, and revenue is recognized ratably over the maintenance term. Maintenance contracts are typically entered into when new software licenses are purchased, at a percentage of the software license fee. In addition, most of our customers renew their maintenance contracts annually to continue receiving product updates and product support. Given the ratable revenue recognition and historically high renewal rates of our subscription and maintenance agreements, this revenue stream has generally been more stable over time than perpetual software license fees. Services revenues are driven by a contract, project or statement of work, in which the fees may be fixed for specific services to be provided over time or billed on a time and materials basis. Perpetual software license sales, which is included in services and other revenues, is often recognized in the quarter that the software is delivered. Individual software license sales can be significant (greater than $1.0 million) and sales cycles are often lengthy and difficult to predict. As such, the timing of a few large software license transactions or the recognition of license revenue from these transactions can substantially affect our quarterly operating results.

These different revenue streams also carry different gross margins. Revenue from subscription and maintenance fees tends to be higher-margin revenue with gross margins typically around 75% to 80%. Subscription and maintenance fees are generally based on software products developed by us, which carry minimal marginal cost to reproduce and sell. Revenue from labor-intensive services and other fees tends to be lower-margin revenue, with gross margins typically in the 20% to 35% range. Our overall gross margins could fluctuate from period to period depending upon the mix of revenue. For example, a period with a higher mix of license revenue versus services revenue would drive overall gross margin higher and vice versa.

Overview of Quarter Ended March 31, 2008

Our revenues increased to $80.5 million in the three months ended March 31, 2008 compared to $73.4 million in the three months ended March 31, 2007. Subscription and maintenance revenues increased $12.6 million or 37%, partially offset by a decrease in services and other revenues of $5.5 million or 14%. Subscription revenues were $28.6 million in the three months ended March 31, 2008, as compared to $15.7 million in the three months ended March 31, 2007. This is primarily due to an increase in the demand for our subscription software products and the acquisition of Procuri in December 2007. Services and other revenues decreased primarily due to declines in managed services revenues and perpetual license revenues in the three months ended March 31, 2008.

Operating expenses increased to $56.1 million in the three months ended March 31, 2008 compared to $41.6 million in the three months ended March 31, 2007. The increase in operating expenses is primarily attributable to an increase in compensation and benefits expense of $4.8 million due to an increase in headcount in supporting our transition to an on-demand model and our acquisition of Procuri in December 2007, a decrease in other income—Softbank of $3.4 million as a result of the amortization period ending in October 2007, an increase in stock-based compensation expense of $3.1 million associated with restricted stock grants in fiscal year 2008, an increase in sales commission expense of $1.3 million associated with the increase in revenues noted above and a restructuring and integration charge of $690,000 primarily related to severance benefit costs associated with our acquisition of Procuri. In sum, our total net expenses, including cost of revenue and other items, increased to $92.9 million compared to $78.5 million in the three months ended March 31, 2007, which caused a net loss for the three months ended March 31, 2008 of $12.4 million compared to $5.1 million in the three months ended March 31, 2007.

 

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Outlook for Fiscal Year 2008

With our increased backlog, introduction of new offerings and continued shift in demand toward subscription sales, we expect continued growth in subscription revenue in the second half of fiscal year 2008 as compared to the second half of fiscal year 2007.

We believe that our success for fiscal year 2008 will depend largely on our ability to: (1) manage the continuing shift to an on-demand delivery model from both a product and a financial standpoint; (2) sell bundled solution offerings that include both technology and expert services; (3) renew our subscription or time-based revenues, including on-demand software fees, maintenance fees, and fees for certain services; (4) capitalize on new revenue opportunities, such as fees for the Ariba Supplier Network and selling on-demand spend management solutions to smaller and mid-market customers; and (5) effectively manage the integration of Procuri’s operations with our business.

We believe that key risks to our revenues in the second half of fiscal year 2008 include: our ability to introduce additional versions of our products in the remainder of fiscal year 2008; our ability to renew ratable revenue streams without substantial declines from prior arrangements, including subscription software, software maintenance and subscription services; the impact of transitioning managed procurement customers to subscription software customers; our ability to generate organic growth; our deferral of services revenues as a result of including software implementation and other services as part of a sale with our subscription software solutions; the market acceptance of spend management solutions as a standalone market category; the overall level of information technology spending; our ability to recognize benefits from the Procuri acquisition; and potential declines in average selling prices. We believe that key risks to our future operating profitability include: our ability to maintain or grow our revenues; our ability to maintain adequate utilization of our services organization; our ability to renew sublease agreements and find new tenants for abandoned space; and the potential adverse impacts resulting from legal proceedings. Our prospects must be considered in light of the risks encountered by companies at a relatively early stage of development, particularly given that we operate in new and rapidly evolving markets and face an uncertain economic environment. We may not be successful in addressing such risks and difficulties. See “Risk Factors” for additional information.

 

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Results of Operations

The following table sets forth statements of operations data for the periods indicated (in thousands, except per share data). The data has been derived from the unaudited Condensed Consolidated Financial Statements contained in this Form 10-Q which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the interim periods presented. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Form 10-K for the fiscal year ended September 30, 2007 filed with the SEC on November 15, 2007.

 

     Three Months Ended
March 31,
    Six Months Ended
March 31,
 
     2008     2007     2008     2007  

Revenues:

        

Subscription and maintenance

   $ 46,798     $ 34,219     $ 86,824     $ 68,238  

Services and other

     33,740       39,200       70,688       82,348  
                                

Total revenues

     80,538       73,419       157,512       150,586  
                                

Cost of revenues:

        

Subscription and maintenance

     10,454       8,195       19,322       16,044  

Services and other

     24,029       29,196       48,635       59,526  

Amortization of acquired technology and customer intangible assets

     4,685       3,734       8,194       7,430  
                                

Total cost of revenues

     39,168       41,125       76,151       83,000  
                                

Gross profit

     41,370       32,294       81,361       67,586  
                                

Operating expenses:

        

Sales and marketing

     29,432       23,096       54,544       46,072  

Research and development

     13,944       13,033       27,261       25,591  

General and administrative

     11,806       8,714       25,308       18,286  

Other income—Softbank

     —         (3,389 )     (566 )     (6,783 )

Amortization of other intangible assets

     210       124       319       324  

Restructuring and integration

     690       —         4,528       —    

Litigation provision

     —         —         5,900       —    
                                

Total operating expenses

     56,082       41,578       117,294       83,490  
                                

Loss from operations

     (14,712 )     (9,284 )     (35,933 )     (15,904 )

Interest and other income, net

     2,863       4,896       6,207       8,006  
                                

Net loss before income taxes

     (11,849 )     (4,388 )     (29,726 )     (7,898 )

Provision for income taxes

     549       684       992       1,261  
                                

Net loss

   $ (12,398 )   $ (5,072 )   $ (30,718 )   $ (9,159 )
                                

Comparison of the Three and Six Months Ended March 31, 2008 and 2007

Revenues

Please refer to Note 1 of Notes to Condensed Consolidated Financial Statements for a description of our accounting policy related to revenue recognition.

Subscription and maintenance

Subscription and maintenance revenues for the three months ended March 31, 2008 were $46.8 million, a 37% increase from the $34.2 million recorded in the three months ended March 31, 2007. Subscription revenues

 

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for the three months ended March 31, 2008 were $28.6 million, an 83% increase from the $15.7 million recorded in the three months ended March 31, 2007. The increase of $12.9 million in subscription revenues was primarily due to an increase in the demand for our subscription software products, the continued growth of Ariba Supplier Network revenues and the acquisition of Procuri in December 2007. Maintenance revenues for the three months ended March 31, 2008 were $18.2 million, a slight decrease from the $18.6 million recorded in the three months ended March 31, 2007.

Subscription and maintenance revenues for the six months ended March 31, 2007 were $86.8 million, a 27% increase from the $68.2 million recorded in the six months ended March 31, 2006. Subscription revenues for the six months ended March 31, 2008 were $49.4 million, a 60% increase from the $30.8 million recorded in the six months ended March 31, 2007. The increase of $18.6 million in subscription revenues was primarily due to an increase in the demand for our subscription software products, the continued growth of Ariba Supplier Network revenues and the acquisition of Procuri in December 2007. Maintenance revenues were $37.4 million recorded in each of the six months ended March 31, 2008 and 2007. We anticipate that subscription revenues will increase in fiscal year 2008 compared to fiscal year 2007.

Services and other

Services and other revenues for the three months ended March 31, 2008 were $33.7 million, a 14% decrease from the $39.2 million recorded in the three months ended March 31, 2007. Services and other revenues for the six months ended March 31, 2008 were $70.7 million, a 14% decrease from the $82.3 million recorded in the six months ended March 31, 2007. The decrease in services and other revenues in both periods is primarily attributable to declines in managed services revenues and perpetual license revenues in the three and six months ended March 31, 2008. We anticipate that services and other revenues will decline in fiscal year 2008 compared to fiscal year 2007 primarily due to the continued transition of managed procurement customers to subscription software customers and continuing declines in perpetual license revenues.

Cost of Revenues

Subscription and maintenance

Cost of subscription and maintenance revenues consists of labor costs for hosting services and technical support, including stock compensation costs and facilities and equipment costs. Cost of subscription and maintenance revenues for the three months ended March 31, 2008 was $10.5 million, a 28% increase over the $8.2 million recorded in the three months ended March 31, 2007. Cost of subscription and maintenance revenues for the six months ended March 31, 2008 was $19.3 million, a 20% increase over the $16.0 million recorded in the six months ended March 31, 2007. These increases are primarily the result of an increase in hosted support costs associated with the overall 83% and 60% increase in subscription revenues in the three and six months ended March 31, 2008, respectively. We anticipate that cost of subscription and maintenance expenses will remain relatively consistent as a percentage of revenues in the year ending September 30, 2008 compared to the year ended September 30, 2007.

Services and other

Cost of services and other revenues consists of labor costs for consulting services, including stock compensation costs, training personnel, facilities and equipment costs. Cost of services and other revenues for the three months ended March 31, 2008 was $24.0 million, an 18% decrease from the $29.2 million recorded in the three months ended March 31, 2007. This decrease is primarily due to the following: (1) decreased compensation and benefits, overhead expense and bonus expense of $2.0 million, $1.0 million and $490,000 associated with a 7% decrease in average consulting headcount; and (2) decreased sub-contractor services expense of $1.4 million primarily due to the decline in services revenues noted above.

Cost of services and other revenues for the six months ended March 31, 2008 was $48.6 million, an 18% decrease from the $59.5 million recorded in the six months ended March 31, 2007. This decrease is primarily the

 

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result of the following: (1) decreased compensation and benefits, overhead expense, bonus expense and travel expense of $5.1 million, $2.0 million, $589,000 and $647,000, respectively, associated with an 11% decrease in average consulting headcount; (2) decreased sub-contractor services expense of $2.0 million primarily due to the decline in services revenues noted above; and (3) decreased stock-based compensation expense of $702,000 primarily due to the acceleration of unvested stock options in the six months ended March 31, 2007. We anticipate that cost of services and other revenues will decline as a percentage of revenues in the year ending September 30, 2008 compared to the year ended September 30, 2007 due to continued operational improvements in consulting and managed services.

Amortization of acquired technology and customer intangible assets

Amortization of acquired technology and customer intangible assets represents the amortization of the costs allocated to technology and customer relationships in our fiscal year 2004 business combination with FreeMarkets and our acquisition of Procuri in December 2007. This expense amounted to $4.7 million and $3.7 million in the three months ended March 31, 2008 and 2007, respectively, and $8.2 million and $7.4 million in the six months ended March 31, 2008 and 2007, respectively. The increase in the three and six months ended March 31, 2008 is primarily attributable to our acquisition of Procuri in December 2007. We anticipate amortization of acquired technology and customer intangible assets will remain relatively consistent in the year ended September 30, 2008 compared to the year ended September 30, 2007 due to costs resulting from our acquisition of Procuri offset by decreases in costs resulting from our merger of FreeMarkets as assets reach the end of their estimated useful lives.

Gross profit

Our gross profit as a percentage of revenues for the three months ended March 31, 2008 was 51% compared to 44% for the three months ended March 31, 2007 and was 52% in the six months ended March 31, 2008 compared to 45% for the six months ended March 31, 2007. The increase in gross profit was primarily due to the shift in our revenue mix, as the gross margin of software subscription and maintenance revenues is typically much higher than the gross margin of services revenues. Subscription and maintenance revenues contributed 58% and 55% of total revenues in the three months ended and six months ended March 31, 2008, respectively, as compared to 47% and 45% in the three and six months ended March 31, 2007, respectively, while services and other revenues contributed 42% and 45% of total revenues in the three and six months ended March 31, 200, respectively as compared to 53% and 55% in the three and six months ended March 31, 2008, respectively. The increase in gross profit as a percentage of revenues is also due to continued operational improvements in consulting services in the three and six months ended March 31, 2008.

Operating Expenses

Sales and marketing

Sales and marketing includes costs associated with our sales, marketing and product marketing personnel, and consists primarily of compensation and benefits, commissions and bonuses, stock compensation, promotional and advertising and travel and entertainment expenses related to these personnel, as well as the provision for doubtful accounts. Sales and marketing expenses for the three months ended March 31, 2008 were $29.4 million, a 27% increase from the $23.1 million recorded in the three months ended March 31, 2007. This increase is primarily due to the following: (1) increased compensation and benefits expense of $2.8 million associated with a 17% increase in average sales and marketing headcount in supporting our transition to an on-demand model and the acquisition of Procuri in December 2007; (2) increased stock-based compensation expense of $1.7 million primarily due to restricted stock grants in the six months ended March 31, 2008; and (3) increased sales commission expense of $1.3 million primarily associated with the increase in revenues noted above.

Sales and marketing expenses for the six months ended March 31, 2008 were $54.5 million, an 18% increase from the $46.1 million recorded in the six months ended March 31, 2007. This increase is primarily due

 

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to the following: (1) increased compensation and benefits expense and overhead costs of $2.8 million and $1.5 million, respectively, associated with a 22% increase in average sales and marketing headcount in supporting our transition to an on-demand model and the acquisition of Procuri in December 2007; (2) increased stock-based compensation expense of $2.1 million primarily due to restricted stock grants in the six months ended March 31, 2008; and (3) increased sales commission expense of $1.5 million primarily associated with the increase in revenues noted above. We anticipate that sales and marketing expenses will increase slightly as a percentage of revenues in the year ending September 30, 2008 compared to the year ended September 30, 2007.

Research and development

Research and development includes costs associated with the development of new products, enhancements of existing products for which technological feasibility has not been achieved, and quality assurance activities, and primarily includes employee compensation and benefits, stock compensation, consulting costs and the cost of software development tools and equipment. Research and development expenses for the three months ended March 31, 2008 were $13.9 million, a 7% increase from the $13.0 million recorded in the three months ended March 31, 2007. This increase is primarily attributable to an increase in compensation and benefits of $747,000 due to a 10% increase in average headcount related to the continued development of our on-demand solutions and the acquisition of Procuri in December 2007.

Research and development expenses for the six months ended March 31, 2008 were $27.3 million, a 7% increase from the $25.6 million recorded in the six months ended March 31, 2007. This increase is primarily attributable to the following; (1) increased compensation and benefits of $1.4 million due to a 9% increase in average headcount related to the continued development of our on-demand solutions in fiscal year 2008 and the acquisition of Procuri in December 2007; and (2) increased stock-based compensation expense of $372,000 primarily due to restricted stock grants in the six months ended March 31, 2008. We anticipate that research and development expenses will slightly decline as a percentage of revenues in the year ending September 30, 2008 compared to the year ended September 30, 2007.

 

General and administrative

General and administrative includes costs for executive, finance, human resources, information technology, legal and administrative support functions. General and administrative expenses for the three months ended March 31, 2008 were $11.8 million, a 35% increase from the $8.7 million recorded in the three months ended March 31, 2007. This increase is primarily attributable to the following: (1) increased compensation and benefits and overhead costs of $1.3 million and $588,000, respectively, due to a 6% increase in average headcount related to the support of our on-demand solutions in fiscal year 2008 and the acquisition of Procuri in December 2007; and (2) increased stock-based compensation expense of $928,000 primarily due to restricted stock grants in the six months ended March 31, 2008.

General and administrative expenses for the six months ended March 31, 2008 were $25.3 million, a 38% increase from the $18.3 million recorded in the six months ended March 31, 2007. This increase is primarily attributable to the following: (1) increased legal expenses of $3.2 million primarily associated with patent infringement matters; (2) increased compensation and benefits and overhead costs of $1.6 million and $978,000, respectively, due to a 6% increase in average headcount related to the support of our on-demand solutions in fiscal year 2008 and the acquisition of Procuri in December 2007; and (3) increased stock-based compensation expense of $1.4 million primarily due to restricted stock grants in the six months ended March 31, 2008. We anticipate that general and administrative expenses will increase slightly as a percentage of revenues in the year ending September 30, 2008 compared to the year ended September 30, 2007.

Other income—Softbank

During the three months ended March 31, 2008 and 2007, we recorded $0 and $3.4 million, respectively, of income from the settlement with Softbank entered into in October 2004. During the six months ended March 31,

 

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2008 and 2007, we recorded $566,000 and $6.8 million, respectively, of income from the settlement with Softbank. The $37.0 million of deferred income recorded upon the settlement with Softbank was being recognized into income, starting in January 2005, over the remaining term of the three-year license ended October 2007. For further discussion, see Note 9 to the Condensed Consolidated Financial Statements.

Amortization of other intangible assets

Amortization of other intangible assets was $210,000 and $124,000 for the three months ended March 31, 2008 and 2007, respectively, and $319,000 and $324,000 for the six months ended March 31, 2008 and 2007, respectively, which primarily consisted of amortization of trademark intangible assets acquired from our merger with FreeMarkets and our acquisition of Procuri. We anticipate amortization of other intangible assets will increase slightly in the year ended September 30, 2008 compared to the year ended September 30, 2007 due to our acquisition of Procuri.

Restructuring and integration

We recorded a restructuring charge of $690,000 and $4.5 million in the three and six months ended March 31, 2008. The charge in the three months ended March 31, 2008 primarily related to severance benefit costs in connection with our acquisition of Procuri. Additionally, in the six months ended March 31, 2008, we evaluated our office space in Sunnyvale, California, and ceased use of approximately 31,500 square feet of space in our corporate headquarters and recorded lease abandonment costs of $3.1 million and leasehold impairments of $386,000 in the six months ended March 31, 2008. In addition, we recorded a charge of $378,000 related to severance benefit costs in connection with our acquisition of Procuri in the six months ended March 31, 2008.

Litigation provision

We recorded a $5.9 million provision related to a patent infringement litigation matter during the six months ended March 31, 2008.

Interest and other income, net

Interest and other income, net for the three months ended March 31, 2008 was $2.9 million, compared to $4.9 million recorded in the three months ended March 31, 2007. The decrease is primarily attributable to the following: (1) a net realized gain of $2.2 million associated with the repatriation of cash from Ariba Korea and the substantial liquidation of the entity in the three months ended March 31, 2007; and (2) a decrease in interest income of $1.1 million primarily due to a decrease in our average cash and investments as a result of the acquisition of Procuri in December 2007. These decreases were partially offset by an increase of realized foreign currency transaction gains in the amount of $1.4 million on accounts receivable billed from Ariba, Inc. in foreign currencies to customers headquartered in foreign countries, primarily due to the U.S. dollar weakening against the Euro and the British Pound in the three months ended March 31, 2008.

Interest and other income, net for the six months ended March 31, 2008 was $6.2 million, compared to $8.0 million recorded in the six months ended March 31, 2007. The decrease is primarily attributable to the following: (1) a net realized gain of $2.2 million associated with the repatriation of cash from Ariba Korea and the substantial liquidation of the entity in the six months ended March 31, 2007; (2) a decrease in interest income of $1.1 million primarily due to a decrease in our average cash and investments as a result of the acquisition of Procuri in December 2007. These amounts were partially offset by an increase in realized foreign currency transaction gains in the amount of $1.8 million on accounts receivable billed from Ariba, Inc. in foreign currencies to customers headquartered in foreign countries, primarily due to the U.S. dollar weakening against the Euro and the British Pound in the six months ended March 31, 2008.

 

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Provision for income taxes

Provision for income taxes for the three months ended March 31, 2008 was $549,000, compared to $684,000 in the three months ended March 31, 2007. Provision for income taxes for the six months ended March 31, 2008 was $992,000 compared to $1.3 million in the six months ended March 31, 2007. The decrease in the six months ended March 31, 2008 is primarily attributable to a decrease in foreign income taxes related to a foreign subsidiary.

Liquidity and Capital Resources

As of March 31, 2008, we had $94.6 million in cash, cash equivalents and long-term investments and $29.9 million in restricted cash, for total cash, cash equivalents, marketable securities, long-term investments and restricted cash of $124.5 million. All significant cash, cash equivalents, marketable securities and long-term investments are held in accounts in the United States. As of September 30, 2007, we had $153.0 million in cash, cash equivalents, marketable securities and long-term investments and $30.0 million in restricted cash, for total cash, cash equivalents, marketable securities, long-term investments and restricted cash of $183.0 million.

We hold a variety of interest bearing auction rate securities (“ARS”) that represent investments in pools of assets, including student loans, commercial paper and credit derivative products. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected all of our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Contractual maturity dates for these ARS investments range from 2016 to 2047. All of the ARS investments are investment grade quality and were in compliance with our investment policy at the time of acquisition. We currently have the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity. As of March 31, 2008, we reclassified the entire ARS investment balance from marketable securities to long-term investments on our condensed consolidated balance sheet because of our inability to determine when our investments in ARS would settle. We have also modified our current investment strategy and increased our investments in more liquid money market instruments.

Typically the fair value of ARS investments approximates par value due to the frequent resets through the auction process. While we continue to earn interest on our ARS investments at the contractual rate, these investments are not currently trading and therefore do not currently have a readily determinable market value. Accordingly, the estimated fair value of ARS no longer approximates par value.

We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of March 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of the ARS. Based on this assessment of fair value, as of March 31, 2008 we determined there was a decline in the fair value of our ARS investments of $4.5 million, all of which was deemed temporary.

We review our impairments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and related guidance issued by the FASB and SEC in order to determine the classification of the impairment as “temporary” or “other-than-temporary”. A temporary impairment charge results in an unrealized loss being recorded in the other comprehensive income (loss) component of stockholders’ equity. Such an unrealized loss does not affect net income (loss) for the applicable accounting period. An other-than-temporary impairment charge is recorded as a realized loss in the condensed consolidated statement of operations and reduces net income (loss) for the applicable accounting period. In evaluating the impairment of each ARS, we classified such impairment as temporary. The differentiating factors between temporary and other- than-temporary impairment are primarily the length of the time and the extent to which the market value has been

 

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less than cost, the financial condition and near-term prospects of the issuer and our intent and ability to retain our investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value. If the issuers of the ARS are unable to successfully close future auctions or refinance their debt in the near term and/or the credit ratings of these instruments deteriorate, the Company may, in the future, conclude that an other-than-temporary impairment charge is required related to these investments. Such other-than-temporary impairment may be greater than the $4.5 million currently accounted for as a temporary decline.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.

If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income (loss) or impairment charges in future quarters. We continue to monitor the market for ARS transactions and consider their impact (if any) on the fair value of our investments.

Our short-term investments are intended to establish a high-quality portfolio that preserves principal, meets liquidity needs, avoids inappropriate concentrations and delivers an appropriate yield in relationship to our investment guidelines and market conditions. We have decided to modify our current investment strategy by limiting our investments in ARS to our current holdings and increasing our investments in more liquid investments.

The decrease in total cash, cash equivalents, marketable securities, long-term investments and restricted cash of $58.5 million in the six months ended March 31, 2008 is primarily attributable to cash paid, net of cash acquired, of $55.5 million related to our acquisition of Procuri in the six months ended March 31, 2008.

Net cash provided by operating activities was $2.7 million for the six months ended March 31, 2008, compared to net cash provided by operating activities of $7.0 million for the six months ended March 31, 2007. Cash flows from operating activities decreased $4.3 million primarily due to net cash payments of $5.9 million related to a litigation settlement associated with a patent infringement matter in the six months ended March 31, 2008 and an increase in cash payments related to legal expenses primarily associated with patent infringement matters of approximately $4.2 million. These amounts were partially offset by an increase in cash flows from operating activities of associated with the management of our accounts payable.

Net cash provided by investing activities was $8.3 million for the six months ended March 31, 2008, compared to net cash used in investing activities of $21.4 million for the six months ended March 31, 2007. The increase of $29.7 million is primarily attributable to an increase in sales of investments, net of purchases of $85.9 million. This was partially offset by cash paid of $55.5 million as a result of our acquisition of Procuri in the six month ended March 31, 2008. Capital expenditures were relatively consistent in the six months ended March 31, 2008 and 2007.

Net cash provided by financing activities was $269,000 for the six months ended March 31, 2008, compared to net cash provided by financing activities of $1.7 million for the six months ended March 31, 2007. The repurchase of common stock in both periods represents shares forfeited to Ariba by employees in satisfaction of statutory tax withholding obligations incurred as a result of the vesting of restricted shares of common stock held by those employees. Proceeds from the issuance of common stock in both periods is attributed to stock option exercises and the employee stock purchase plan.

Contractual obligations

Our primary contractual obligations are from operating leases for office space and letters of credit related to those leases. See Note 4 to the Condensed Consolidated Financial Statements for a discussion of our lease commitments and letters of credit.

 

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Other than the lease commitments and letters of credit discussed in Note 4 to the Condensed Consolidated Financial Statements, we do not have commercial commitments under lines of credit, standby repurchase obligations or other such debt arrangements. We do not have any material noncancelable purchase commitments as of March 31, 2008. There have been no material changes in our contractual obligations and commercial commitments during the six months ended March 31, 2008 from those presented in our Annual Report on Form 10-K filed with the SEC on November 15, 2007.

Off-balance sheet arrangements

We have no off-balance sheet arrangements or transactions with unconsolidated limited purpose entities, nor do we have any undisclosed material transactions or commitments involving related persons or entities.

Anticipated cash flows

We expect to incur significant operating costs, particularly related to services delivery costs, sales and marketing, research and development and restructuring costs, for the foreseeable future in order to execute our business plan. We anticipate that such operating costs, as well as planned capital expenditures, will constitute a material use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales, changes in deferred revenues, our ability to manage infrastructure costs, the outcome of our subleasing activities related to abandoned excess leased facilities and ongoing regulatory and legal proceedings.

We believe our existing cash, cash equivalents and investment balances, together with anticipated cash flow from operations, should be sufficient to meet our working capital and operating resource requirements for at least the next twelve months. See “Risk Factors.” After the next twelve months, we may find it necessary to obtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all.

Application of Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Accounting policies, methods and estimates are an integral part of the preparation of consolidated financial statements in accordance with GAAP and, in part, are based upon management’s current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods and estimates are particularly sensitive because of their significance to the consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management’s current judgments. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are particularly significant include:

 

   

Revenue recognition policies

 

   

Allowance for doubtful accounts receivable

 

   

Recoverability of goodwill

 

   

Impairment of long-lived assets

 

   

Lease abandonment costs

 

   

Legal contingencies

 

   

Accounting for income taxes

These critical accounting policies and estimates, their related disclosures and other accounting policies, methods and estimates have been reviewed by our senior management and audit committee. With the exception of the below paragraph that discusses the impact of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48) on our critical accounting policy and estimates for accounting for income taxes, during the six months ended March 31, 2008 there were no significant

 

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changes in our critical accounting policies and estimates. Please refer to Note 1 of Notes to Condensed Consolidated Financial Statements and to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended September 30, 2007 for a more complete discussion of our critical accounting policies and estimates.

On October 1, 2007, we adopted FIN 48, which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with Statement 109, Accounting for Income Taxes. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon effective settlement. During our first quarter of fiscal 2008, we adjusted our policy in the accounting for and presentation of uncertain tax positions in order to comply with the interpretive guidance set forth in FIN 48. See Note of Notes to Condensed Consolidated Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

We develop products primarily in the United States of America and India and market our products in the United States of America, Latin America, Europe, Canada, Australia, Middle East and Asia. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since the majority of our non-U.S. sales are priced in currencies other than the U.S. dollar, a strengthening of the dollar may reduce the level of reported revenues. If such events were to occur, our net revenues could be seriously impacted, since a significant portion of our net revenues are derived from international operations. For the three months ended March 31, 2008 and 2007, 29% and 27%, respectively, of our total net revenues were derived from customers outside of the United States. As a result, our U.S. dollar earnings and net cash flows from international operations may be adversely affected by changes in foreign currency exchange rates.

We use derivative instruments to manage risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to reduce our net exposures, by currency, related to the monetary assets and liabilities of our foreign operations denominated in local currency. In addition, from time to time, we may enter into forward exchange contracts to establish with certainty the U.S. dollar amount of future firm commitments denominated in a foreign currency. The forward contracts do not qualify for hedge accounting and accordingly, all of these instruments are marked to market at each balance sheet date by a charge to earnings. We believe that these forward contracts do not subject us to undue risk due to foreign exchange movements because gains and losses on these contracts are generally offset by losses and gains on the underlying assets and liabilities. We do not use derivatives for trading or speculative purposes. All contracts have a maturity of less than one year.

The following table provides information about our foreign exchange forward contracts outstanding as of March 31, 2008 (in thousands):

 

     Buy/Sell    Contract Value    Unrealized
Gain/(Loss) in
USD
 
        Foreign
Currency
   USD   

Foreign Currency

           

Euro

   Sell    3,000    $ 4,552    $ (179 )

Japanese Yen

   Sell    250,000      2,512      3  

Switzerland Franc

   Buy    1,000      1,001      5  

Czech Koruna

   Buy    15,000      907      32  

Singapore Dollar

   Buy    900      658      2  
                     

Total

         $ 9,630    $ (137 )
                     

 

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The unrealized gain represents the difference between the contract value and the market value of the contract based on market rates as of March 31, 2008.

Given our foreign exchange position, a ten percent change in foreign exchange rates upon which these forward exchange contracts are based would result in unrealized exchange gains or losses of approximately $963,000. In all material aspects, these exchange gains and losses would be fully offset by exchange losses or gains on the underlying net monetary exposures. We do not expect material exchange rate gains and losses from other foreign currency exposures.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified investments, consisting only of investment grade securities. We hold investments in both fixed rate and floating rate interest earning instruments, and both carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall.

Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities which may have declined in market value due to changes in interest rates. Our investments may fall short of expectations due to changes in market conditions and as such we may suffer losses at the time of sale due to the decline in market value.

We hold a variety of interest bearing auction rate securities (“ARS”) that represent investments in pools of assets, including student loan auction rate securities and credit derivative products. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected all of our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Maturity dates for these ARS investments range from 2016 to 2047. As of March 31, 2008, we reclassified our entire balance from marketable securities to long-term investments on our condensed consolidated balance sheet because of our inability to determine when our investments in ARS would settle. We currently have the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity. As of March 31, 2008, we reclassified the entire ARS investment balance from marketable securities to long-term investments on our condensed consolidated balance sheet because of our inability to determine when our investments in ARS would settle. We have also modified our current investment strategy and increased our investments in more liquid money market investments.

We have used a discounted cash flow model to determine the estimated fair value of our investment in ARS as of March 31, 2008. The assumptions used in preparing the discounted cash flow model include estimates for interest rates, timing and amount of cash flows and expected holding periods of the ARS. Based on this assessment of fair value, as of March 31, 2008 we determined there was a decline in the fair value of our ARS investments of $4.5 million, all of which was deemed temporary. An immediate and uniform increase in market interest rates of 100 basis points from levels at March 31, 2008 would cause an additional decline of approximately 6%, or $1.7 million, in the fair market value of our investments in ARS.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.

 

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If the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income (loss) or impairment charges in future quarters.

The table below represents principal (or notional) amounts and related weighted-average interest rates by year of maturity of our investment portfolio (in thousands, except for interest rates).

 

    Period Ending
March 31,
2009
    Period Ending
March 31,
2010
  Period Ending
March 31,
2011
    Period Ending
March 31,
2012
  Period Ending
March 31,
2013
    Thereafter     Total  

Cash equivalents

  $ 56,180     $ —     $ —       $ —     $ —       $ —       $ 56,180  

Average interest rate

    3.16 %     —       —         —       —         —         3.16 %

Investments

  $ —       $ —     $ —         —       —         22,107     $ 22,107  

Average interest rate

    —         —       —         —       —         3.56 %     3.56 %

Restricted cash

  $ 315     $ —     $ 356     $ —       29,204     $ —       $ 29,875  

Average interest rate

    1.88 %     —       2.40 %     —       2.40 %     —         2.39 %
                                                   

Total investment securities

  $ 56,495     $ —     $ 356     $ —     $ 29,204     $ 22,107     $ 108,162  
                                                   

The table above does not include uninvested cash of $16.3 million held as of March 31, 2008. Total cash, cash equivalents, long-term investments and restricted cash as of March 31, 2008 was $124.5 million.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008, the end of the period covered by this report on Form 10-Q. This evaluation (the “controls evaluation”) was done under the supervision and with the participation of management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Rules adopted by the SEC require that we disclose the conclusions of the CEO and the CFO about the effectiveness of our disclosure controls and internal controls based upon the controls evaluation.

Disclosure controls and procedures means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act, such as this report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed such that information is accumulated and communicated to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, the benefits of controls must be considered relative to their costs and that there are inherent limitations in all control systems. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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As of March 31, 2008, management evaluated the effectiveness of our disclosure controls and procedures and concluded those disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

The litigation discussion set forth in Note 4 of Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.

 

Item 1A. Risk Factors

A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.

We Compete in New and Rapidly Evolving Markets, and Our Spend Management Solutions Are At a Relatively Early Stage of Development. These Factors Make Evaluation of Our Future Prospects Difficult.

Spend management software applications and services are at a relatively early stage of development. For example, in September 2001, we introduced the majority of our initial Ariba Spend Management solutions and after our merger with FreeMarkets in 2004, we introduced several new products and services integrating functionality acquired in the merger. We also introduced on-demand versions of a number of our software products throughout fiscal year 2006, fiscal year 2007 and the first half of fiscal year 2008 and we plan to introduce additional on-demand versions of our products in the future. These new and planned products may be more challenging to implement than our more established products, as we have less experience deploying these applications. The markets in which we compete are characterized by rapid technological change, evolving customer needs and frequent introductions of new products and services. As we adjust to evolving customer requirements and competitive pressures, we may be required to further reposition our product and service offerings and introduce new products and services. We may not be successful in developing and marketing such product and service offerings, or we may experience difficulties that could delay or prevent the development and marketing of such product and service offerings, which could have a material adverse effect on our business, financial condition or results of operations.

Economic Conditions and Reduced Information Technology Spending May Adversely Impact Our Business.

Our business depends on the overall demand for enterprise software and services and on the economic health of our current and prospective customers. Many economists have predicted that the U.S. and other parts of the world may experience a recession in 2008 and beyond. Weak economic conditions, or a reduction in information technology spending even with healthy economic conditions, could adversely impact our business in a number of ways including longer sales cycles, lower average selling prices and reduced bookings and revenues.

Our Success Depends on Market Acceptance of Standalone Spend Management Solutions.

Our success depends on widespread customer acceptance of standalone spend management solutions from vendors like us, rather than solutions from ERP software vendors and others that are part of a broader enterprise application solution. For example, ERP vendors, such as Oracle and SAP, could bundle spend management modules with their existing applications and offer these modules at little or no cost. If our products and services do not achieve continued customer acceptance, our business will be seriously harmed.

We Have a History of Losses and May Incur Significant Additional Losses in the Future.

We have a significant accumulated deficit as of March 31, 2008, resulting in large part from cumulative charges for the amortization and impairment of goodwill and other intangible assets. We may incur significant losses in the future for a number of reasons, including those discussed in other risk factors and the following:

 

   

adverse economic conditions;

 

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the failure of our standalone spend management solutions business to mature as a separate market category;

 

   

declines in average selling prices of our products and services resulting from competition or the introduction of newer products that generally have lower list prices than our more established products and other factors;

 

   

failure to successfully grow our sales channels;

 

   

failure to maintain control over costs;

 

   

increased restructuring charges resulting from the failure to sublease excess facilities at anticipated levels and rates; and

 

   

charges incurred in connection with any future restructurings or acquisitions.

 

Our Quarterly Operating Results Are Volatile, Difficult to Predict and May Be Unreliable as Indicators of Future Performance Trends.

Our quarterly operating results have varied significantly in the past and will likely continue to vary significantly in the future. As a result, period-to-period comparisons of our results may not be meaningful and should not be relied upon as indicators of future performance. In addition, we may fail to achieve forecasts of quarterly and annual revenues and operating results.

Our quarterly operating results have varied or may vary depending on a number of factors, including the following:

Risks Related to Revenues:

 

   

fluctuations in demand, sales cycles and average selling price for our products and services;

 

   

reductions in customers’ budgets for information technology purchases and delays in their purchasing cycles;

 

   

fluctuations in the number of relatively larger orders for our products and services;

 

   

increased dependence on relatively smaller orders from a larger number of customers;

 

   

dependence on generating revenues from new revenue sources;

 

   

delays in recognizing revenue from multiple element arrangements;

 

   

ability to renew ratable revenue streams, including subscription software, software maintenance and subscription services, without substantial declines from prior arrangements,

 

   

changes in the mix of types of customer agreements and related timing of revenue recognition; and

 

   

changes in our product line such as our release of on-demand versions of our software products in fiscal year 2006, fiscal year 2007 and fiscal year 2008 and our planned release of additional on-demand versions in the future.

Risks Related to Expenses:

 

   

our overall ability to control costs, including managing reductions in expense levels through restructuring and severance payments;

 

   

the level of expenditures relating to ongoing legal proceedings;

 

   

costs associated with changes in our pricing policies and business model;

 

   

costs associated with the amortization of stock-based compensation expense; and

 

   

the failure to adjust our workforce to changes in the level of our operations.

 

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Our On-Demand Strategy Carries a Number of Risks Which May Be Harmful to Our Business.

We derive a substantial portion of our revenue from subscriptions to our on-demand applications. As customers increasingly move away from purchasing a perpetual license toward purchasing a subscription license, we have experienced and may continue to experience a deferral of revenues and cash payments from customers.

Additional risks with the on-demand model include the following:

 

   

as a result of increased demands on our engineering organization to develop multi-tenant versions of our products while supporting and enhancing our existing products, we may not introduce multi-tenant versions of our products or enhancements to our products on a timely and cost-effective basis or at appropriate quality levels;

 

   

we have experienced and expect to continue to experience a decrease in the demand for our implementation services to the extent fewer customers license our software products as installed applications;

 

   

we may not successfully achieve market penetration in our newly targeted markets, including target customers we characterize as middle-market companies; and

 

   

we may incur costs at a higher than forecasted rate as we expand our on-demand operations.

Our Business Could Be Seriously Harmed If We Fail to Retain Our Key Personnel.

Our future performance depends on the continued service of our senior management, product development and sales personnel. The loss of the services of one or more of these personnel could seriously harm our business. Our ability to retain key employees may be harder given that we have substantial operations in several geographic regions, including Sunnyvale, California, Pittsburgh, Pennsylvania, Atlanta, Georgia and Bangalore, India. In addition, uncertainty created by turnover of key employees could result in reduced confidence in our financial performance which could cause fluctuations in our stock price and result in further turnover of our employees.

Our Revenues In Any Quarter May Fluctuate Significantly Because Our Sales Cycles Can Be Long and Unpredictable.

Our sales cycles can be long and unpredictable. The purchase of our products is often discretionary and generally involves a significant commitment of capital and other resources by a customer. It frequently takes several months to finalize a sale and requires approval at a number of management levels within the customer organization. The implementation and deployment of our products requires a significant commitment of resources by our customers and third parties and/or professional services organizations. As a result of the length and unpredictability of our sales cycle, our revenues in any quarter may fluctuate significantly.

Revenues in Any Quarter May Vary to the Extent Recognition of Revenue Is Deferred When Contracts Are Signed. As a Result, Revenues in Any Quarter May Be Difficult to Predict and Are an Unreliable Indicator of Future Performance Trends.

We frequently enter into contracts where we recognize only a portion of the total revenue under the contract in the quarter in which we enter into the contract. For example, we may recognize revenue on a ratable basis over the life of the contract or enter into contracts where the recognition of revenue is conditioned upon delivery of future product or service elements. The portion of revenues recognized on a deferred basis may vary significantly in any given quarter, and revenues in any given quarter are a function both of contracts signed in such quarter and contracts signed in prior quarters.

 

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Revenues From Our Ariba Sourcing Solution Could Be Negatively Affected If Customers Elect Not to Renew Their Contracts in Fiscal Year 2008 and Beyond

We have several large multi-year contracts for our full service sourcing services, some of which will come up for renewal during the second half of fiscal year 2008 and beyond. If these customers do not renew their contracts upon expiration, or if they elect to use one of our lower-cost self-service solutions, our future revenues may decrease.

A Decline in Revenues May Have a Disproportionate Impact on Operating Results and Require Further Reductions in Our Operating Expense Levels.

Because our expense levels are relatively fixed in the near term and are based in part on expectations of our future revenues, any decline in our revenues to a level that is below our expectations would have a disproportionately adverse impact on our operating results for that quarter.

We Are Subject to Evolving and Expensive Corporate Governance Regulations and Requirements. Our Failure to Adequately Adhere to These Requirements or the Failure or Circumvention of Our Controls and Procedures Could Seriously Harm Our Business and Results of Operations.

Because we are a publicly-traded company, we are subject to certain federal, state and other rules and regulations, including those required by the Sarbanes-Oxley Act of 2002. Compliance with these evolving regulations is costly and requires a significant diversion of management time and attention, particularly with regard to our disclosure controls and procedures and our internal control over financial reporting. Although we have reviewed our disclosure and internal controls and procedures in order to determine whether they are effective, our controls and procedures may not be able to prevent fraud or other errors in the future. Faulty judgments, simple errors or mistakes, or the failure of our personnel to adhere to established controls and procedures may make it impossible for us to ensure that the objectives of the control system are met. A failure of our controls and procedures to detect fraud or other errors could seriously harm our business and results of operations.

We Sometimes Experience Long Implementation Cycles, Which May Increase Our Operating Costs and Delay Recognition of Revenues.

Many of our products are complex applications that are generally deployed with many users. Implementation of these applications by enterprises is complex, time consuming and expensive. Long implementation cycles may delay the recognition of revenue as some of our customers engage us to perform system implementation services, which can defer revenue recognition for the related software license revenue. In addition, when we experience long implementation cycles, we may incur costs at a higher level than anticipated, which may reduce the anticipated profitability of a given implementation.

 

If a Sufficient Number of Suppliers Do Not Join and Maintain Their Participation In the Ariba Supplier Network, It May Not Attract a Sufficient Number of Buyers and Other Sellers Required to Make the Network Successful.

In order to provide buyers on the Ariba Supplier Network an organized method for accessing goods and services, we rely on suppliers to maintain web-based product catalogs, indexing services and other content aggregation tools. Any failure of suppliers to join the Ariba Supplier Network in sufficient numbers, or of existing suppliers to maintain their participation in the Ariba Supplier Network as a result of increase access charges or otherwise, would make the network less attractive to buyers and consequently other suppliers. Our inability to access and index these catalogs and services provided by suppliers would result in our customers having fewer products and services available to them through our solutions, which would adversely affect the perceived usefulness of the Ariba Supplier Network.

 

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We Could Be Subject to Potential Claims Related to Our On-Demand Solutions, As Well As the Ariba Supplier Network.

We warrant to our customers that our on-demand solutions and the Ariba Supplier Network will achieve specified performance levels to allow our customers to conduct their transactions. To the extent we fail to meet warranted performance levels, we could be obligated to provide refunds or credits for future use or maintenance. Further, to the extent that a customer incurs significant financial hardship due to the failure of our on-demand solutions or the Ariba Supplier Network to perform as specified, we could be exposed to additional liability claims.

Failure to Establish and Maintain Strategic Relationships with Third Parties Could Seriously Harm Our Business, Results of Operations and Financial Condition.

We have established strategic relationships with a number of other companies. These companies are entitled to resell our products, to host our products for their customers, and/or to implement our products within their customers’ organizations. We cannot be assured that any existing or future resellers or hosting or implementation partners will perform to our expectations. For example, in the past we have not realized the anticipated benefits from strategic relationships with a number of resellers. If our current or future strategic partners do not perform to expectations, or if they experience financial difficulties that impair their operating capabilities, our business, operating results and financial condition could be seriously harmed.

We Face Intense Competition. If We Are Unable to Compete Successfully, Our Business Will Be Seriously Harmed.

The market for our solutions is intensely competitive, evolving and subject to rapid technological change. This competition could result in further price pressure, reduced profit margins and loss of market share, any one of which could seriously harm our business. Competitors vary in size and in the scope and breadth of the products and services they offer. We compete with several major enterprise software companies, including SAP and Oracle. We also compete with several service providers, including McKinsey & Company and A.T. Kearney. In addition, we compete with smaller specialty vendors or smaller niche providers of sourcing or procurement products and services, including Emptoris, Zycus, America Express S2S, Perfect Commerce, cc-Hubwoo, Ketera Technologies and Iasta. Because spend management is a relatively new software category, we expect additional competition from other established and emerging companies if this market continues to develop and expand. For example, third parties that currently help implement Ariba Buyer and our other products could begin to market products and services that compete with our products and services. These third parties, which include IBM, Accenture, Capgemini, Deloitte Consulting, BearingPoint and Unisys, are generally not subject to confidentiality or non-compete agreements that restrict such competitive behavior.

Many of our current and potential competitors, such as ERP software vendors including Oracle and SAP, have longer operating histories, significantly greater financial, technical, marketing and other resources, significantly greater name recognition and a larger installed base of customers than us. These vendors could also introduce spend management solutions that are included as part of broader enterprise application solutions at little or no cost. In addition, many of our competitors have well-established relationships with our current and potential customers and have extensive knowledge of our industry. In the past, we have lost potential customers to competitors for various reasons, including lower prices and incentives not matched by us. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs. Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly increase their market share. We also expect that competition will increase as a result of industry consolidations. The industry has experienced consolidation with both larger and smaller competitors acquiring companies to broaden their offerings or increase scale. As a result, we may not be able to successfully compete against our current and future competitors.

 

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Any Future Acquisitions Will Be Subject to a Number of Risks.

Any future acquisitions will be subject to a number of risks, including:

 

   

the diversion of management time and resources;

 

   

the difficulty of assimilating the operations and personnel of the acquired companies;

 

   

the potential disruption of our ongoing business;

 

   

the difficulty of incorporating acquired technology and rights into our products and services;

 

   

unanticipated expenses related to integration of the acquired companies;

 

   

difficulties in implementing and maintaining uniform standards, controls, procedures and policies;

 

   

the impairment of relationships with employees and customers as a result of any integration of new management personnel;

 

   

potential unknown liabilities associated with acquired businesses; and

 

   

impairment of goodwill and other assets acquired.

The Benefits We Anticipate From Acquiring Procuri May Not Be Realized.

We acquired Procuri with the expectation that the acquisition will result in various benefits including, among other things, accelerating our penetration into the mid-market segment, enhancing our customer base and recognizing efficiencies. We may not realize any of these benefits or may not realize them as rapidly, or to the extent, anticipated by our management and certain financial or industry analysts. Procuri’s contribution to our financial results may not meet the current expectations of our management for a number of reasons, including integration risks, and could dilute our profits beyond the current expectations of our management. Potential liabilities assumed in connection with our acquisition of Procuri also could have an adverse effect on our business, financial condition and operating results. If these risks materialize, our stock price could be materially adversely affected.

If We Fail to Develop Products and Services on a Timely and Cost-Effective Basis, or If Our Products or Services Contain Defects, Our Business Could Be Seriously Harmed.

In developing new products and services, we may:

 

   

fail to develop, introduce and market products in a timely or cost-effective manner;

 

   

find that our products and services are obsolete, noncompetitive or have shorter life cycles than expected;

 

   

fail to develop new products and services that adequately meet customer requirements or achieve market acceptance; or

 

   

develop products that contain undetected errors or failures when first introduced or as new versions are released.

If new releases of our products or potential new products are delayed, we could experience a delay or loss of revenues and customer dissatisfaction.

Pending Litigation Could Seriously Harm Our Business.

There can be no assurance that existing or future litigation will not have a material adverse effect on our business, financial position, results of operations or cash flows, or that the amount of any accrued losses is sufficient for any actual losses that may be incurred. See Note 4 of Notes to Condensed Consolidated Financial Statements.

 

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We May Incur Additional Restructuring Charges that Adversely Affect Our Operating Results.

We have recorded significant restructuring charges in the past relating to the abandonment of numerous leased facilities, including most notably portions of our Sunnyvale, California headquarters. For example, in the six months ended March 31, 2008, we evaluated our office space in Sunnyvale, California, and ceased use of approximately 31,500 square feet of space in our corporate headquarters and recorded lease abandonment costs of $3.1 million and leasehold impairments of $386,000. Moreover, we have from time to time revised our assumptions and expectations regarding lease abandonment costs, resulting in additional charges.

We review these estimates each reporting period, and to the extent that our assumptions change, the ultimate restructuring expenses for these abandoned facilities could vary significantly from current estimates. For example, a reduction in assumed market lease rates of $0.25 per square foot per month for the remaining term of the leases, with all other assumptions remaining the same, would increase the estimated lease abandonment loss on the vacated portions of our Sunnyvale, California headquarters by $1.9 million as of March 31, 2008. Additional lease abandonment costs, resulting from the abandonment of additional facilities or changes in estimates and expectations about facilities already abandoned, could adversely affect our operating results.

We May Be Required to Record Impairment Charges in Future Quarters as a Result of the Decline in Value of Our Investments in Auction Rate Securities.

We hold a variety of interest bearing auction rate securities (“ARS”) that represent investments in pools of assets, including student loans, commercial paper and credit derivative products. These ARS investments are intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The recent uncertainties in the credit markets have affected all of our holdings in ARS investments and auctions for our investments in these securities have failed to settle on their respective settlement dates. Consequently, the investments are not currently liquid and we will not be able to access these funds until a future auction of these investments is successful or a buyer is found outside of the auction process. Contractual maturity dates for these ARS investments range from 2016 to 2047 with principal distributions occurring on certain securities prior to maturity.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact its valuation include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates and ongoing strength and quality of market credit and liquidity.

Although we currently have the ability and intent to hold these ARS investments until a recovery of the auction process or until maturity, if the current market conditions deteriorate further, or the anticipated recovery in market values does not occur, we may be required to record additional unrealized losses in other comprehensive income (loss) or impairment charges in future quarters.

We May Incur Goodwill Impairment Charges that Adversely Affect Our Operating Results.

We review goodwill for impairment annually and more frequently if events and circumstances indicate that the asset may be impaired and that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, a significant decline in our stock price for a sustained period, and decreases in our market capitalization below the recorded amount of our net assets for a sustained period. Our stock price is highly volatile and has experienced significant declines in the past. The balance of goodwill is $406.3 million as of March 31, 2008 and, there can be no assurance that future goodwill impairments will not occur.

 

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Our Stock Price Is Highly Volatile and the Market Price of Our Common Stock May Decrease in the Future.

Our stock price has fluctuated dramatically. There is a significant risk that the market price of our common stock will decrease in the future in response to any of the following factors, some of which are beyond our control:

 

   

variations in our quarterly operating results;

 

   

announcements that our revenues or income are below analysts’ expectations;

 

   

changes in analysts’ estimates of our performance or industry performance;

 

   

general economic slowdowns;

 

   

changes in market valuations of similar companies;

 

   

sales of large blocks of our common stock;

 

   

announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

the loss of a major customer or our failure to complete significant license transactions; and

 

   

additions or departures of key personnel.

We Are at Risk of Further Securities Class Action Litigation Due to Our Stock Price Volatility.

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities. We have experienced significant volatility in the price of our stock over the past two years. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could seriously harm our business.

If the Protection of Our Intellectual Property Is Inadequate, Our Competitors May Gain Access to Our Technology, and We May Lose Customers.

We depend on our ability to develop and maintain the proprietary rights of our technology. To protect our proprietary technology, we rely primarily on a combination of contractual provisions, including customer licenses that restrict use of our products, confidentiality agreements and procedures, and patent, copyright, trademark and trade secret laws. We have 31 patents issued in the United States, but may not develop other proprietary products that are patentable. Despite our efforts, we may not be able to adequately protect our proprietary rights, and our competitors may independently develop similar technology, duplicate our products or design around any patents issued to us. This is particularly true because some foreign laws do not protect proprietary rights to the same extent as those of the United States and, in the case of our solutions, because the validity, enforceability and type of protection of proprietary rights in these technologies are uncertain and evolving. If we fail to adequately protect our proprietary rights, we may lose customers.

There has been a substantial amount of litigation in the software industry and the Internet industry regarding intellectual property rights. For example, in the six months ended March 31, 2008, we agreed to settle with Sky for $7.9 million related to two lawsuits alleging that certain products of Ariba and Procuri infringed patents held by Sky. See “Litigation—General” in Note 4 of Notes to Condensed Consolidated Financial Statements. It is possible that in the future, other third parties may claim that we or our current or potential future products infringe their intellectual property rights. We expect that software product developers and providers of electronic commerce solutions will increasingly be subject to infringement claims, and third parties may claim that we or our current or potential future products infringe their intellectual property. Any claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

 

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We must now, and may in the future have to, license or otherwise obtain access to intellectual property of third parties. For example, we are currently dependent on developers’ licenses from ERP, database, human resource and other systems software vendors in order to ensure compliance of our products with their management systems. In addition, we rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our software products to perform key functions. For example, we license integration software from TIBCO for Ariba Buyer. If we are unable to continue to license any of this software on commercially reasonable terms, or at all, we will face delays in releases of our software until equivalent technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely affect our business.

In addition, we may need to commence litigation or take other actions to protect our intellectual property rights. For example, in April 2007, we filed a lawsuit against Emptoris, Inc. for patent infringement in the United States District Court for the Eastern District of Texas. On November 20, 2007, Emptoris sued us for infringement of one of its patents in the same Texas court where our patent claims are pending. See “Litigation-Patent Litigation with Emptoris, Inc.” in Note 4 of Notes to Condensed Consolidated Financial Statements. These lawsuits and other potential litigation and actions brought by us could be costly, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attaching the validity and enforceability of our intellectual property rights.

If Our Security Measures Fail or Unauthorized Access to Customer Data Is Otherwise Obtained, Our Solutions May Be Perceived As Not Being Secure, Customers May Curtail or Stop Using Our Solutions, And We May Incur Significant Liabilities.

Our operations involve the storage and transmission of our customers’ confidential information, and security breaches could expose us to a risk of loss of this information, litigation, indemnity obligations and other liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to our customers’ data, our reputation will be damaged, our business may suffer and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and we could lose potential revenues and existing customers.

Further, because our products transmit data and information belonging to our customers, many customers and prospects require us to meet specific security standards or to maintain security certifications with respect to our products and operations. Given the complexity of our business and the costs and efforts required to meet the high standards to maintain these security certifications, there is no guarantee that we can achieve or maintain any such certifications or standards. If we fail to meet the standards for these security certifications, it could negatively impact our ability to attract new or keep existing customers and it could seriously harm our business.

Our Business Is Susceptible to Numerous Risks Associated with International Operations.

International operations have represented a significant portion of our revenues over the past three years. We have committed and expect to continue to commit significant resources to our international sales and marketing activities. We are subject to a number of risks associated with these activities. These risks generally include:

 

   

currency exchange rate fluctuations;

 

   

unexpected changes in regulatory requirements;

 

   

tariffs, export controls and other trade barriers;

 

   

longer accounts receivable payment cycles and difficulties in collecting accounts receivable;

 

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difficulties in managing and staffing international operations;

 

   

potentially adverse foreign tax consequences, including withholding in connection with the repatriation of earnings;

 

   

the burdens of complying with a wide variety of foreign laws; and

 

   

political instability.

For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. For example, since the majority of our non-U.S. sales are priced in currencies other than the U.S. dollar, a strengthening of the dollar may reduce the level of reported revenues. If such events were to occur, our net revenues could be seriously impacted, since a significant portion of our net revenues are derived from international operations. We hedge risks associated with foreign currency transactions in order to minimize the impact of changes in foreign currency exchange rates on earnings. We utilize forward contracts to hedge trade and intercompany receivables and payables. There can be no assurance that our hedging strategy will be successful or that currency exchange rate fluctuations will not have a material adverse effect on our operating results.

Anti-takeover Provisions in Our Charter Documents and Delaware Law Could Discourage, Delay or Prevent a Change in Control of Our Company and May Affect the Trading Price of Our Common Stock.

Certain anti-takeover provisions in our certificate of incorporation and bylaws and certain provisions of Delaware law may have the effect of delaying, deferring or preventing a change in control of the Company without further action by our stockholders, may discourage bids for our common stock at a premium over the market price of our common stock and may adversely affect the market price of our common stock and other rights of our stockholders.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

We have granted shares of restricted common stock that allow statutory tax withholding obligations incurred upon vesting of those shares to be satisfied by forfeiting a portion of those shares to us. The following table shows the shares acquired by us upon forfeiture of restricted shares during the quarter ended March 31, 2008.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

   Total Number of
Shares
Purchased
   Average Price Paid
per Share
   Total Number of
Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number (or
Approximate Dollar
Value) of Shares That
May Yet be
Purchased
Under the Plans or
Program

January 1, 2008—January 31, 2008

   —      $ —      —      —  

February 1, 2008—February 29, 2008

   105,025      9.41    —      —  

March 1, 2008—March 31, 2008

   356      9.72    —      —  
                 

Total

   105,381    $ 9.41    —      —  
                 

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

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Item 4. Submission of Matters to a Vote of Security Holders

The Company held its annual meeting of stockholders in Sunnyvale, California on March 12, 2008. Of the 84,885,296 shares outstanding and entitled to vote at the meeting, 59,713,059 shares were present or represented by proxy at the meeting. At the meeting, the following actions were voted upon:

a. Election of Robert M. Calderoni as a director of the Company’s board of directors to serve until the Company’s 2011 annual meeting of stockholders or until his successor is duly elected and qualified.

 

For:

   57,853,756   

Withheld:

   1,859,303   

b. Election of Robert E. Knowling, Jr. as a director of the Company’s board of directors to serve until the Company’s 2011 annual meeting of stockholders or until his successor is duly elected and qualified.

 

For:

   57,741,762   

Withheld:

   1,971,297   

 

Item 5. Other Information

Not applicable.

 

Item 6. Exhibits

 

Exhibit

    No.    

  

Exhibit Title

10.51‡    Ariba Bonus Plan—Executive Officers.
10.52‡    Ariba, Inc.—Compensation Program for Non-Employee Directors.
31.1        Certification of Chief Executive Officer.
31.2        Certification of Chief Financial Officer.
32.1        Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ARIBA, INC.
By:   /s/    JAMES W. FRANKOLA        
  James W. Frankola
  Executive Vice President and Chief Financial Officer
  (Principal Financial and Accounting Officer)

Date: May 7, 2008

 

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