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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - ARIBA INCdex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - ARIBA INCdex312.htm
EX-10.49 - 1999 EQUITY INCENTIVE PLAN - ROBERT CALDERONI - ARIBA INCdex1049.htm
EX-10.46 - 1999 EQUITY INCENTIVE PLAN - AHMED RUBAIE - ARIBA INCdex1046.htm
EX-10.45 - SECOND AMENDMENT TO SUBLEASE - ARIBA INCdex1045.htm
EX-10.47 - 1999 EQUITY INCENTIVE PLAN - KENT PARKER - ARIBA INCdex1047.htm
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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 December 31, 2010

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    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 (as defined 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 December 31, 2010 was 93,361,000.

 

 

 

 


Table of Contents

ARIBA, INC.

INDEX

 

          Page
No.
 

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements      3   
  

Condensed Consolidated Balance Sheets as of December 31, 2010 (unaudited) and September 30, 2010

     3   
  

Condensed Consolidated Statements of Operations for the three months ended
December 31, 2010 and 2009 (unaudited)

     4   
  

Condensed Consolidated Statements of Cash Flows for the three months ended
December 31, 2010 and 2009 (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      32   

Item 4.

   Controls and Procedures      34   

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      36   

Item 1A.

   Risk Factors      36   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      46   

Item 3.

   Defaults Upon Senior Securities      46   

Item 5.

   Other Information      46   

Item 6.

   Exhibits      47   
   Signatures      48   


Table of Contents

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     December 31,
2010
    September 30,
2010
 
     (unaudited)        
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 221,754      $ 182,393   

Short-term investments

     15,706        18,449   

Restricted cash

     104        104   

Accounts receivable, less allowances of $2,473 and $2,537, respectively

     23,565        21,781   

Prepaid expenses and other current assets

     19,901        7,942   
                

Total current assets

     281,030        230,669   

Property and equipment, net

     15,999        15,958   

Long-term investments

     24,219        22,283   

Restricted cash, less current portion

     29,137        29,137   

Goodwill

     394,718        406,507   

Other intangible assets, net

     12,129        13,154   

Other assets

     4,293        4,001   
                

Total assets

   $ 761,525      $ 721,709   
                
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 13,617      $ 11,190   

Accrued compensation and related liabilities

     17,086        32,079   

Accrued liabilities

     20,663        18,398   

Restructuring obligations

     15,901        17,188   

Deferred revenue

     113,167        97,005   
                

Total current liabilities

     180,434        175,860   

Deferred rent obligations

     8,342        9,880   

Restructuring obligations, less current portion

     17,443        23,339   

Deferred revenue, less current portion

     12,028        7,285   

Other long-term liabilities

     1,508        6,391   
                

Total liabilities

     219,755        222,755   
                

Stockholders’ equity:

    

Common stock

     187        188   

Additional paid-in capital

     5,237,531        5,236,265   

Accumulated other comprehensive loss

     (2,427     (1,879

Accumulated deficit

     (4,693,521     (4,735,620
                

Total stockholders’ equity

     541,770        498,954   
                

Total liabilities and stockholders’ equity

   $ 761,525      $ 721,709   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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ARIBA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited; in thousands, except per share data)

 

     Three Months Ended
December 31,
 
     2010     2009  

Revenues:

    

Subscription and maintenance

   $ 65,858      $ 58,373   

Services and other

     24,562        16,819   
                

Total revenues

     90,420        75,192   
                

Cost of revenues:

    

Subscription and maintenance

     14,290        12,674   

Services and other

     15,307        12,448   

Amortization of acquired technology and customer intangible assets

     1,025        1,327   
                

Total cost of revenues

     30,622        26,449   
                

Gross profit

     59,798        48,743   
                

Operating expenses:

    

Sales and marketing

     35,716        26,692   

Research and development

     12,492        11,146   

General and administrative

     10,610        10,012   

Amortization of other intangible assets

     —          104   

Restructuring benefit

     (2,923     —     
                

Total operating expenses

     55,895        47,954   
                

Operating income

     3,903        789   

Interest and other income (expense), net

     769        277   
                

Income from continuing operations before income taxes

     4,672        1,066   

(Benefit) provision for income taxes

     (3,812     17   
                

Income from continuing operations

     8,484        1,049   

Discontinued operations, net of tax:

    

(Loss) income from discontinued operations

     (5,104     1,176   

Gain on sale of discontinued operations

     38,719        —     
                

Total discontinued operations

     33,615        1,176   
                

Net income

   $ 42,099      $ 2,225   
                

Basic earnings per share:

    

Income from continuing operations

   $ 0.09      $ 0.01   

Discontinued operations, net of tax

     0.38        0.02   
                

Net income per basic common share

   $ 0.47      $ 0.03   
                

Diluted earnings per share:

    

Income from continuing operations

   $ 0.09      $ 0.01   

Discontinued operations, net of tax

     0.36        0.02   
                

Net income per diluted common share

   $ 0.45      $ 0.03   
                

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)

 

     Three Months Ended
December 31,
 
     2010     2009  

Operating activities:

    

Net income

   $ 42,099      $ 2,225   

Less income from discontinued operations, net of tax

     (33,615     (1,176
                

Income from continuing operations

     8,484        1,049   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    

Provision for doubtful accounts

     165        46   

Depreciation

     2,074        1,839   

Amortization of intangible assets

     1,025        1,431   

Stock-based compensation

     12,834        13,106   

Restructuring benefit

     (2,923     —     

Other-than-temporary impairment of long-term investments

     —          499   

Changes in operating assets and liabilities:

    

Accounts receivable

     (1,949     (52

Prepaid expenses and other assets

     (652     (889

Accounts payable

     91        79   

Accrued compensation and related liabilities

     (13,695     (11,431

Accrued liabilities

     (6,535     (85

Deferred revenue

     20,917        9,030   

Restructuring obligations

     (4,260     (4,326
                

Net cash provided by continuing operations

     15,576        10,296   

Net cash (used in) provided by discontinued operations

     (1,121     209   
                

Net cash provided by operating activities

     14,455        10,505   
                

Investing activities:

    

Proceeds from sale of discontinued operations

     39,000        —     

Purchases of property and equipment

     (2,115     (1,386

Maturities of long-term investments, net of purchases

     459        (7,631
                

Net cash provided by (used in) investing activities

     37,344        (9,017
                

Financing activities:

    

Proceeds from issuance of common stock

     431        27   

Repurchase of common stock

     (12,802     (5,056
                

Net cash used in financing activities

     (12,371     (5,029
                

Effect of foreign exchange rate changes on cash and cash equivalents

     (67     (7

Net change in cash and cash equivalents

     39,361        (3,548

Cash and cash equivalents at beginning of period

     182,393        130,881   
                

Cash and cash equivalents at end of period

   $ 221,754      $ 127,333   
                

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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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” or “Ariba”), is the leading provider of collaborative business commerce solutions for buying and selling goods and services. Ariba combines industry-leading software as a service (“SaaS”) technology to optimize the complete commerce lifecycle with the world’s largest business oriented web-based community to discover, connect and collaborate with a global network of trading partners and expert capabilities to augment internal resources and skills, delivering everything needed to control costs, minimize risk, improve profits and enhance cash flow and operations, all in the Ariba® Commerce Cloud. Over 340,000 companies, including more than 80 percent of the Fortune 500, use Ariba’s solutions to drive more efficient inter-enterprise commerce. 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, 2011. 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 Securities and Exchange Commission’s rules and regulations. 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, 2010 filed on November 23, 2010 with the Securities and Exchange Commission (“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, 2010. As discussed in Note 2 below, in November 2010 the Company sold its sourcing services and business process outsourcing (“BPO”) business. Accordingly, the sourcing services and BPO business has been reported as discontinued operations for all periods presented. The notes to condensed consolidated financial statements reflect historical amounts exclusive of discontinued operations, unless otherwise noted.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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, the fair value of investments and collectibility of accounts receivable.

Fair Value

Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable

 

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inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

Level 1 — Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date. Examples of the assets carried at Level 1 fair value generally are equities listed in active markets and investments in publicly traded mutual funds with quoted market prices.

Level 2 — Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the asset/liability’s anticipated life.

Level 3 — Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

The availability of observable inputs can vary and is affected by a wide variety of factors, including, for example, the type of a security, whether the security is new and not yet established in the marketplace, and other characteristics particular to a transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. When observable prices are not available, the Company either uses implied pricing from similar instruments or valuation models based on net present value of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those it believes market participants would use in pricing the asset or liability at the measurement date. See Note 9 for fair value related to the Company’s cash equivalents, short-term investments, long-term investments and restricted cash.

Concentration of credit risk

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, short-term investments, long-term investments and trade accounts receivable. The Company maintains its cash, cash equivalents, short-term investments and long-term investments with high quality financial institutions and limits its investment in individual securities based on the type and credit quality of each such security. The Company’s customer base consists of both domestic and 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.

No customer accounted for more than 10% of total revenues for the three months ended December 31, 2010 and 2009. No customer accounted for more than 10% of net accounts receivable as of December 31, 2010 and September 30, 2010.

Recent Accounting Pronouncements

During the three months ended December 31, 2010, there were no new accounting pronouncements adopted by the Company or issued by the Financial Accounting Standards Board (“FASB”) that would have a significant impact on continuing operations.

Revenue Recognition

Substantially all of the Company’s revenues are derived from the following sources: (i) subscription software solutions on a multi-tenant basis and single-tenant basis either hosted or behind the firewall;

 

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(ii) maintenance and support related to existing single-tenant perpetual licenses; and (iii) services, including implementation services, strategic consulting services, training, education, premium support and other miscellaneous services. The subscription software solutions include technical support and product updates. The significant majority of the Company’s subscription software solutions are hosted time-based license and are based on the number of users, spend or other usage criteria. The Company’s multiple element arrangements typically include a combination of: (i) subscription software solutions; and (ii) 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 subscription software 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 and all other criteria are met as defined below. The license agreements for the Company’s subscription software only provide for a right of return in limited and defined circumstances, and historically product returns have not been significant. The Company does not recognize revenue on agreements subject to refund or 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 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.

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.

In September 2009, the FASB issued new guidance on accounting for multiple deliverable revenue arrangements. The new guidance:

 

  (i) provides updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the consideration should be allocated;

 

  (ii) requires an entity to establish an estimated selling price (“ESP”) for all deliverables when vendor-specific objective evidence (“VSOE”) of selling price or third-party evidence (“TPE”) of selling price does not exist; and

 

  (iii) eliminates the use of the residual method and requires an entity to allocate revenue using the relative selling price method.

The Company elected to early adopt this accounting guidance at the beginning of its first quarter of fiscal year 2010 on a prospective basis for applicable transactions originating or materially modified after September 30, 2009. The new guidance allows for deliverables with stand alone value in a multi-element arrangement for which revenue was previously deferred due to undelivered elements not having VSOE of selling price to be separated and recognized as delivered, rather than over the longest service delivery period as a single unit with other elements in the arrangement.

For transactions entered into prior to the first quarter of fiscal year 2010, the Company allocated 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 was based on VSOE of selling price, which is limited to the price when sold separately. Revenue from subscription software, hosting and sourcing solutions services was primarily recognized ratably over the term of the arrangement, commencing with the initial customer access date. Set up fees paid by customers in connection with multi-tenant subscription software solutions are recognized ratably over the longer of the life of the agreement or the expected lives of customer relationships, which generally range from three to 5 years. Revenue allocated to maintenance and support was recognized ratably over the maintenance term (typically one year). Revenue allocated to software

 

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implementation, process improvement, training and other services was 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 VSOE of selling price could not be established for undelivered service elements, was recognized ratably over the term of the access agreement. In circumstances where the Company provided services as part of a multi-element arrangement with subscription software, both the subscription software revenue and service revenue were recognized under the lesser of proportional performance method based on hours or ratable over the subscription term. When revenue associated with multiple element arrangements was recognized and more than one element in that arrangement did not have VSOE of selling price, the Company first allocated revenue to those elements for which VSOE of selling price was available and the residual was allocated to those elements that did not have VSOE of selling price.

The Company does sell implementation services, strategic consulting, training and other services in stand-alone engagements. Maintenance and support are sold separately through renewals of annual contracts. As a result, the Company has used and intends to continue using VSOE of selling price to allocate the arrangement consideration to each of these deliverables. Consistent with its methodology under previous accounting guidance, the Company determines VSOE of selling price based on its normal pricing and discounting practices for the specific service when sold separately. In determining VSOE of selling price, the Company requires that a substantial majority of the selling prices for a service fall within a reasonably narrow pricing range, generally evidenced by approximately 80% of such historical stand-alone transactions falling within plus or minus 15% of the median rates. In addition, the Company considers the geographies in which the services are sold and major service groups in determining VSOE of selling price.

However, the Company is not always able to establish VSOE of selling price for all deliverables in an arrangement with multiple elements. This may be due to the Company infrequently selling each element separately, not pricing products within a narrow range, or only having a limited sales history. When VSOE of selling price cannot be established, as in the case for all subscription software solutions along with certain services, the Company attempts to establish selling price of each element based on TPE of selling price. TPE of selling price is determined based on competitor prices for similar deliverables when sold separately. Generally, the Company’s go-to-market strategy differs from that of its peers and its offerings contain a level of differentiation such that the comparable pricing of software solutions and services with similar functionality and delivery cannot be obtained. Furthermore, the Company is rarely able to reliably determine what similar competitors’ selling prices are on a stand-alone basis. Therefore, the Company is typically not able to determine TPE of selling price.

For contracts signed or substantially modified after October 1, 2009, and within the scope of the new guidance, the Company uses ESP in its allocation of arrangement consideration when the Company is unable to establish selling price using VSOE or TPE. The objective of ESP is to determine the price at which the Company would transact a sale if the subscription software or other services were sold on a stand-alone basis. ESP is generally used for offerings not priced within a narrow range, and it applies to a majority of the Company’s arrangements with multiple deliverables.

The Company determines ESP for all deliverables that do not have VSOE of selling price by considering multiple factors which include, but are not limited to the following: (i) substantive renewal rates contained within an arrangement for subscription software solutions; (ii) gross margin objectives and internal costs for services; and (iii) pricing practices, market conditions and competitive landscape. The determination of ESP is made through consultation with and approval by the Company’s management, taking into consideration the go-to-market strategy.

The Company regularly reviews VSOE, TPE and ESP and maintains internal controls over the establishment and updates of these estimates. There were no material changes to VSOE, TPE or ESP during the quarter ended December 31, 2010.

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

 

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yet rendered and recognizable and license revenue deferred until all requirements are met. Deferred revenue is recognized as revenue upon delivery of the Company’s product, as services are rendered, or as other requirements 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.

Software development costs

Software development costs are expensed as incurred until technological feasibility, defined as a working prototype, has been established, at which time such costs are capitalized until the product is available for general release to customers. To date, the Company’s software has been available for general release shortly after the establishment of technological feasibility and, accordingly, capitalized development costs have not been material.

The Company follows the guidance set forth by the FASB to accounting for the development of its on-demand application service. This guidance requires companies to capitalize qualifying computer software costs which are incurred during the application development stage and to amortize such costs over the software’s estimated useful life.

Income taxes

Income taxes are computed using an asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. The measurement of current and deferred tax assets and liabilities is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The Company has recorded a valuation allowance to reduce its deferred tax assets to the amount of future tax benefit that is more likely than not to be realized.

The Company follows the guidance set forth by the FASB to accounting for uncertainty in income taxes. The guidance contains a two-step approach to recognizing and measuring uncertain tax positions. 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.

Stock-Based Compensation

The Company maintains stock-based compensation 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 amortizes the fair value of awards on an accelerated basis. The guidance requires that forfeitures be estimated over the vesting period of an award, rather than being recognized as a reduction of compensation expense when the forfeiture actually occurs.

During the three months ended December 31, 2010 and 2009, the Company recorded $195,000 and $158,000, respectively, of stock-based compensation expense associated with employee stock purchase plan programs.

During the three months ended December 31, 2010, the Company granted 187,050 shares of restricted common stock time-based awards to certain employees with a fair value of $3.8 million. This amount is being amortized over the vesting period of the individual restricted common stock grants, which is three years. During

 

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the three months ended December 31, 2009, the Company granted 105,250 shares of restricted common stock to certain employees with a fair value of $1.2 million. This amount is being amortized over the vesting period of the individual restricted common stock grants, which is three years.

In October 2010, the Company granted 990,000 performance-based restricted stock units to executive officers and certain key employees with a fair value of $19.5 million, based on the then current fair value of the Company’s shares at the grant date. The number of units that could vest under this grant is contingent upon meeting three criteria: (1) 2011 performance milestones related to subscription software revenues and network revenues for the fiscal year ended September 30, 2011, (2) 2012 performance milestones based upon sustained performance related to subscription software revenues and network revenues for the fiscal year ended September 30, 2012; and (3) a time-based service requirement. The restricted stock units will not vest if the performance milestones are not achieved.

In November 2009, the Company granted 1.3 million performance-based restricted stock units to executive officers and certain key employees with a fair value of $14.3 million, based on the then current fair value of the Company’s shares at the grant date. The number of units that could vest under this grant is contingent upon meeting three criteria: (1) a 2010 performance milestone related to subscription software revenues for the fiscal year ended September 30, 2010, (2) a 2011 performance milestone based upon sustained performance related to subscription software revenue for the fiscal year ended September 30, 2011; and (3) a time-based service requirement. Based upon subscription software revenues for the year ended September 30, 2010, the granted restricted stock units that can vest up to 1.9 million with a fair value of $21.8 million.

During the three months ended December 31, 2010 and 2009, the Company recorded $12.0 million and $12.1 million, respectively, of stock-based compensation expense associated with restricted stock grants. As of December 31, 2010, there was $46.1 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 $1.4 million and $1.2 million in the three months ended December 31, 2010 and 2009, respectively.

Total stock-based compensation resulting from the ESPP, time-based awards, performance based units and the 401(k) Plan of $13.6 million and $13.5 million was recorded in the three months ended December 31, 2010 and 2009, respectively, to various operating expense categories as follows (in thousands):

 

     Three Months Ended
December 31,
 
     2010      2009  

Cost of revenues—subscription and maintenance

   $ 788       $ 934   

Cost of revenues—services and other

     889         1,186   

Sales and marketing

     6,450         5,546   

Research and development

     1,863         1,377   

General and administrative

     2,844         4,063   

Discontinued operations

     802         417   
                 

Total

   $ 13,636       $ 13,523   
                 

Derivative Financial Instruments

The Company transacts business in various foreign currencies and has established a program that primarily utilizes foreign currency forward contracts to offset the risks associated with the effects of certain foreign currency exposures. Under this program, the Company’s strategy is to have increases or decreases in foreign currency exposures offset by gains or losses on the foreign currency forward contracts to mitigate the risks and volatility

 

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associated with foreign currency transaction gains or losses. The Company’s foreign currency forward contracts generally settle within 90 days. The Company does not use these forward contracts for trading purposes. The Company does not designate these forward contracts as hedging instruments. Accordingly, the Company records the fair value of these contracts as of the end of the reporting period to the consolidated balance sheet with changes in fair value recorded in the consolidated statement of operations. The balance sheet classification for the fair values of these forward contracts is to prepaid expenses and other current assets for unrealized gains and to other current liabilities for unrealized losses. The statement of operations classification for the fair values of these forward contracts is to non-operating income, net, for both realized and unrealized gains and losses.

As of December 31, 2010, the notional amounts of the forward contracts held to sell and purchase U.S. dollars in exchange for other major international currencies were $4.2 million and $18.2 million, respectively, and the unrealized loss on these contracts was $107,000. As of September 30, 2010, the notional amounts of the forward contracts held to sell and purchase U.S. dollars in exchange for other major international currencies were $6.7 million and $18.7 million, respectively, and the unrealized loss on these contracts was $553,000. The notional principal amounts for derivative instruments provided one measure of the transaction volume outstanding as of December 31, 2010, and do not represent the amount of the Company’s exposure to credit or market loss. The Company has determined that the gross exposure for both market and credit risk are deemed immaterial.

The fair value of the foreign currency forward contracts not designated as hedges in the condensed consolidated balance sheet were $134,000 included in prepaid expense and other current assets and $241,000 included in other current liabilities as of December 31, 2010. The fair value of the foreign currency forward contracts not designated as hedges in the condensed consolidated balance sheet were $322,000 included in prepaid expense and other current assets and $875,000 included in other current liabilities as of September 30, 2010. The effects of the foreign currency forward contracts not designated as hedges on net income was a loss of $114,000 and $284,000, respectively, for the three months ended December 31, 2010 and 2009 and was included in interest and other income (expense), net on the condensed consolidated statement of operations.

Note 2—Discontinued Operations

On November 15, 2010, the Company sold its sourcing services and business process outsourcing (BPO) services assets (collectively, the “Sourcing Services Business”) to Accenture for approximately $51.0 million in cash, of which $12.0 million is subject to escrow, resulting in a gain of $39.0 million, less estimated income taxes of $348,000. The release of funds from the escrow is primarily based on the assignment of contracts to Accenture over the two-year period from the closing of the transaction (“contingent consideration”). The estimated fair value of the contingent consideration at December 31, 2010 was $11.6 million and is included in the total sales price. The Company has recorded and will record the fair value of the contingent consideration each reporting period based on expected achievement related to the escrow. The assets of the Sourcing Services Business, which operated in all three of the Company’s geographic operating segments, include the Company’s category expertise, sourcing process expertise and strategic sourcing execution resources. As of September 30, 2010, the assets of the Sourcing Services Business were comprised of goodwill of $11.8 million. The following table summarizes the financial information for the Sourcing Services Business operations for the three months ended December 31, 2010 and 2009 (in thousands, except per share amounts):

 

     Three Months Ended
December 31,
 
     2010     2009  

Revenues from discontinued operations

   $ 6,502      $ 10,479   

(Loss) income from discontinued operations before income taxes

   $ (5,104   $ 1,214   

Provision for income taxes

     —          38   
                

Net (loss) income from discontinued operations

   $ (5,104   $ 1,176   
                

Gain on sale of discontinued operations, net of tax

   $ 38,719      $ —     
                

 

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Note 3—Other Intangible Assets

The table below reflects changes or activity in the balances related to other intangible assets for the three months ended December 31, 2010 (in thousands):

 

    Useful Life     December 31, 2010     September 30, 2010  
      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      $ (13,300   $ —        $ 13,300      $ (13,300   $ —     

Contracts and related customer relationships

    72 months        80,881        (68,752     12,129        80,881        (67,727     13,154   

Trade names/trademarks

    24 months        2,200        (2,200     —          2,200        (2,200     —     

Non-competition agreements

    24 months        600        (600     —          600        (600     —     
                                                 

Total

    $ 96,981      $ (84,852   $ 12,129      $ 96,981      $ (83,827   $ 13,154   
                                                 

Amortization of other intangible assets for the three months ended December 31, 2010 totaled $1.0 million and was related to customer relationships and was recorded as cost of revenues in the three months ended December 31, 2010.

Amortization of other intangible assets for the three months ended December 31, 2009 totaled $1.4 million. Of the total, amortization of $1.3 million related to contracts and related customer relationships and existing software technology was recorded as cost of revenues in the three months ended December 31, 2009. Amortization of $104,000 primarily related to trade names/trademarks and non-competition agreements was recorded as operating expense in the three months ended December 31, 2009.

As of December 31, 2010, estimated future amortization expense related to intangible assets is $3.1 million for the remainder of fiscal year 2011, $4.1 million in fiscal year 2012, $4.1 million in fiscal year 2013 and $854,000 in fiscal year 2014.

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 lease term commenced in January 2001 through April 2001 and ends in January 2013. The Company occupies approximately 147,000 square feet in this facility. The Company currently subleases over two buildings, totaling 482,000 square feet, to third parties. These subleases expire in January 2013. The remaining 87,000 square feet is available for sublease. Minimum monthly lease payments are approximately $3.6 million and escalate annually, with the total future minimum lease payments amounting to $93.6 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 $28.8 million as of December 31, 2010, as a form of security through fiscal year 2013. Also, the Company is required by other lease agreements to hold an additional $401,000 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 $29.2 million is classified as restricted cash on the Company’s condensed consolidated balance sheet as of December 31, 2010.

The Company also occupies 73,000 square feet of office space in Pittsburgh, Pennsylvania under a lease that expires in December 2017. The Company currently subleases approximately 18,000 square feet to a third party. This location consists principally of the Company’s customer support organization and administrative activities.

 

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The Company occupies approximately 27,000 square feet of office space in Atlanta, Georgia under a lease that expires in June 2013. Operations at this location consist principally of our sales, certain executive management and support activities.

The Company leases certain equipment, software and its facilities under various non-cancelable operating with various expiration dates through 2017. Rental expense was $6.3 million and $6.2 million for the three months ended December 31, 2010 and 2009, respectively. This expense was reduced by sublease income of $3.0 million and $2.8 million for the three months ended December 31, 2010 and 2009, respectively.

The following table summarizes future minimum lease payments and sublease income under noncancelable operating leases as of December 31, 2010 (in thousands):

 

Period Ending September 30,

   Lease
Payments
     Contractual
Sublease
Income
 

2011

   $ 37,774       $ 11,170   

2012

     51,892         15,615   

2013

     21,115         5,379   

2014

     4,610         440   

2015

     3,486         440   

Thereafter

     7,670         990   
                 

Total

   $ 126,547       $ 34,034   
                 

Of the total operating lease commitments noted above, $47.6 million is for occupied properties and $78.9 million is for abandoned properties, which are a component of the restructuring obligation.

Restructuring costs

The following table details accrued restructuring obligations and related activity through December 31, 2010 (in thousands):

 

     Severance
and
benefits
    Lease
abandonment
costs
    Total
restructuring 
costs
 

Accrued restructuring obligations as of October 1, 2009

   $ 42      $ 49,020      $ 49,062   

Cash paid

     (42     (17,072     (17,114

Total charge to operating expense

     —          8,579        8,579   
                        

Accrued restructuring obligations as of September 30, 2010

   $ —        $ 40,527        40,527   

Cash paid

     —          (4,260     (4,260

Total benefit to operating expense

     —          (2,923     (2,923
                        

Accrued restructuring obligations as of December 31, 2010

   $ —        $ 33,344        33,344   
                  

Less: current portion

         15,901   
            

Accrued restructuring obligations, less current portion

       $ 17,443   
            

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. During the three months ended December 31, 2010, the Company entered into an amendment with Juniper Networks, Inc. (“Juniper”), the successor in interest to NetScreen Technologies, Inc. (“NetScreen”) to the sublease dated as of October 18, 2002 between the Company and NetScreen. Pursuant to the amendment, Juniper agreed to lease approximately 86,000 square feet of

 

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additional space at the Company’s Sunnyvale, California headquarters through January 2013. The impact of the execution of the amendment to the sublease agreement with Juniper was a benefit to operating expenses of approximately $2.9 million in the three months ended December 31, 2010. Total lease abandonment costs include lease liabilities offset by sublease income. As of December 31, 2010, $33.3 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 $34.0 million of sublease income.

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 non-cancelable purchase commitments as of December 31, 2010.

Litigation and other proceedings

Patent litigation with Emptoris, Inc.

During the period from April 2007 to January 2010, the Company was involved in patent infringement litigation with Emptoris, Inc. (“Emptoris”). The Company received judgment in its favor, which was affirmed upon appeal, that Emptoris willfully infringed patents of the Company. During the year ended September 30, 2010, the Company received $7.0 million in satisfaction of the monetary portion of the judgment, and the Company recorded $7.0 million of income related to this matter.

General

From time to time, the Company is involved in a variety of claims, suits, investigations, and proceedings arising from the ordinary course of its business, including actions with respect to intellectual property claims, government investigations, labor and employment claims, breach of contract claims, tax, and other matters. Regardless of the outcome, these proceedings can have an adverse impact on the Company because of defense costs, diversion of management resources, and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect our financial position, results of operations, cash flows in a particular period or subject the Company to an injunction that could seriously harm its business. See the risk factors “If the Protection of Our Intellectual Property Is Inadequate, Our Competitors May Gain Access to Our Technology, and We May Lose Customers” and “We Could Be Subject to Potential Claims Related to Our On-Demand Solutions, As Well As the Ariba Supplier Network,” in the Risk Factors section of Part II, Item 1A of this Quarterly Report on Form 10-Q.

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.

 

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As of December 31, 2010, 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.

Note 5—Income Taxes

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. In the three months ended December 31, 2010, the unrecognized tax benefits decreased by $3.6 million, primarily due to the expiration of statutes of limitation in a foreign jurisdiction. As of December 31, 2010, approximately $1.1 million of unrecognized benefits would affect the Company’s effective tax rate if realized. The Company does not anticipate any significant changes to the unrecognized tax benefits in the next twelve months.

The Company released interest and penalties related to lapses of statute of limitations of uncertain tax positions in the Company’s provision for income taxes line of the Company’s condensed consolidated statements of operations of $1.1 million during the three months ended December 31, 2010. The gross amount of interest and penalties accrued as of December 31, 2010 was $421,000.

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 three months ended December 31, 2010:

 

     Three Months Ended
December 31, 2010
 
     Number of
Shares
    Weighted-
Average
Fair
Value
 

Nonvested at beginning of period

     6,207,600      $ 11.32   

Granted

     187,050      $ 20.51   

Vested

     (2,644,036   $ 11.39   

Forfeited

     (163,531   $ 12.45   
          

Nonvested at end of period

     3,587,083      $ 11.69   
          

The fair value of stock awards vested was $54.1 million and $22.5 million for the three months ended December 31, 2010 and 2009, respectively.

The nonvested share roll forward presented above excludes the performance-based restricted stock units granted in the three months ended December 31, 2010. See Stock-Based Compensation in Note 1—Description of Business and Summary of Significant Accounting Policies.

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

 

     Three Months Ended
December 31, 2010
 
     Number
of
Options
    Weighted-
Average
Exercise
Price
     Aggregate
Intrinsic
Value
 

Outstanding at beginning of period

     524,630      $ 11.61      

Exercised

     (38,870   $ 11.09      

Forfeited

     (2,804   $ 45.42      
             

Outstanding and exercisable at end of period

     482,856      $ 11.36       $ 5,500,000   
             

 

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The total intrinsic value of options exercised during the three months ended December 31, 2010 and 2009 was $358,000 and $19,000, 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 first quarter of fiscal 2011 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 December 31, 2010. This amount changes based on the fair market value of the Company’s stock.

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 income for the three months ended December 31, 2010 and 2009 are as follows (in thousands):

 

     Three Months Ended
December 31,
 
     2010     2009  

Net income

   $ 42,099      $ 2,225   

Unrealized (loss) gain on securities, net

     (349     475   

Foreign currency translation adjustments

     (199     (106
                

Comprehensive income

   $ 41,551      $ 2,594   
                

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 as of December 31, 2010 and September 30, 2010 are as follows (in thousands):

 

     December 31,
2010
    September 30,
2010
 

Unrealized loss on securities

   $ (2,578   $ (2,229

Foreign currency translation adjustments

     151        350   
                

Accumulated other comprehensive loss

   $ (2,427   $ (1,879
                

Note 7—Net Income Per Share

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

 

     Three Months Ended
December 31,
 
     2010      2009  

Income from continuing operations

   $ 8,484       $ 1,049   

Discontinued operations, net of tax

     33,615         1,176   
                 

Net income

   $ 42,099       $ 2,225   
                 

Weighted-average common shares—basic

     88,632         85,161   

Add: Effect of dilutive securities

     3,942         3,101   
                 

Weighted-average common shares—diluted

     92,574         88,262   
                 

Income from continuing operations

   $ 0.09       $ 0.01   

Discontinued operations, net of tax

     0.38         0.02   
                 

Net income per common share—basic

   $ 0.47       $ 0.03   
                 

Income from continuing operations

   $ 0.09       $ 0.01   

Discontinued operations, net of tax

     0.36         0.02   
                 

Net income per common share—diluted

   $ 0.45       $ 0.03   
                 

 

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Note 8—Segment Information

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. 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 months ended December 31, 2010 and 2009 (in thousands):

 

     Three Months Ended
December 31,
 
     2010      2009  

Revenue

     

—North America

   $ 56,613       $ 46,392   

—EMEA

     19,334         15,835   

—APAC

     7,063         4,868   

—Corporate revenue

     7,410         8,097   
                 

Total revenue

   $ 90,420       $ 75,192   
                 

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
December 31,
 
     2010      2009  
     (in thousands)  

Contribution margin

     

—North America

   $ 29,694       $ 24,861   

—EMEA

     7,539         6,239   

—APAC

     2,894         1,538   
                 

Total segment contribution margin

   $ 40,127       $ 32,638   
                 

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

 

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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, insurance reimbursement, restructuring and integration costs (benefit), litigation provision, interest and other income (expense), net and provision for income taxes.

The reconciliation of segment information to the Company’s net income from continuing operations before income taxes was as follows for the three months ended December 31, 2010 and 2009 (in thousands):

 

     Three Months Ended
December 31,
 
     2010     2009  

Segment contribution margin

   $ 40,127      $ 32,638   

Corporate revenue

     7,410        8,097   

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

     (45,532     (38,515

Amortization of acquired technology and customer intangible assets

     (1,025     (1,327

Amortization of other intangibles

     —          (104

Restructuring benefit

     2,923        —     

Interest and other income (expense), net

     769        277   
                

Income from continuing operations before income taxes

   $ 4,672      $ 1,066   
                

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
December 31,
 
     2010      2009  

Subscription revenues

   $ 50,244       $ 41,228   

Maintenance revenues

     15,614         17,145   

Services and other revenues

     24,562         16,819   
                 

Total

   $ 90,420       $ 75,192   
                 

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

 

     December 31,
2010
     September 30,
2010
 

Long-Lived Assets:

     

United States

   $ 14,693       $ 14,633   

International

     1,306         1,325   
                 

Total

   $ 15,999       $ 15,958   
                 

 

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Note 9—Fair Value

As of December 31, 2010, the fair value measurements of the Company’s cash equivalents, short-term investments, long-term investments and restricted cash consisted of the following and which are categorized in the table below based upon the fair value hierarchy (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Money market funds

   $ 76,500       $ —         $ —         $ 76,500   

Certificates of deposit and other bank deposits

     131,451         —           —           131,451   

Non-U.S. government securities

     19,703         —           —           19,703   

U.S. government and agency securities

     3,195         —           —           3,195   

Auction rate securities

     —           —           17,027         17,027   
                                   

Total cash equivalents, investments and restricted cash

   $ 230,849       $ —         $ 17,027       $ 247,876   
                                   

The table below presents reconciliations for market securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended December 31, 2010 (in thousands):

 

     Three Months Ended
December 31,
2010
 

Beginning balance as of October 1, 2010

   $ 17,440   

Unrealized losses

     (329

Redemptions

     (150

Accretion and other

     66   
        

Ending fair value as of December 31, 2010

   $ 17,027   
        

Auction rate securities

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 December 31, 2010, the Company held $17.8 million in par value of student loan securities that failed to settle in auctions commencing February 2008 and $3.4 million in par value 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 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 such time as either a future auction of these investments is successful or a buyer is found outside of the auction process. Given the failures in the auction markets, as well as the lack of any correlation of these instruments to other observable market data, there are no longer observable inputs available as defined by Levels 1 and 2 of the fair value hierarchy by which to value these securities. Therefore, these auction rate securities are classified within Level 3 and their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities.

Contractual maturity dates for these ARS investments range from 2016 to 2047. The ARS backed by student loans are guaranteed by the U.S. government and have credit ratings of AAA to A. The ARS investments were in compliance with the Company’s investment policy at the time of acquisition and are investment grade quality, except for one credit derivative product.

Currently, we have no intent to sell these ARS investments prior to recovery nor are aware of any factors that would make such a sale of the ARS investments more likely than not. As of December 31, 2010, the

 

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Company has classified the entire ARS investment balance as long-term investments on its condensed consolidated balance sheet because of its 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 its investments in more liquid money market instruments.

Historically, 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 (“DCF”) model to determine the estimated fair value of its investment in ARS as of December 31, 2010. Significant estimates used in the DCF models were the credit quality of the instruments, the types of instruments and an illiquidity discount factor. 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. The discount factor used for the $17.8 million of student loan securities and $3.4 million of commercial paper and credit derivative products was adjusted by 150 basis points (“bps”) for the student loan securities and 1,100 bps for the credit derivative product, respectively, to reflect the then current market conditions for instruments with similar credit quality at the date of valuation and the risk in the marketplace for these investments that has arisen due to the lack of an active market for these instruments. Based on the assessment of fair value through December 31, 2010, the Company determined there was a decline in the fair value of its ARS investments of $4.2 million, of which $2.6 million was deemed temporary. As a result of the credit rating reduction to below investment grade related to one of its ARS, the Company recorded an other-than-temporary impairment of $1.9 million, partially offset by $305,000 of accretion recorded through December 31, 2010. Based upon its analysis of this impairment, the Company determined that the other-than-temporary loss of $1.6 million was principally related to the credit loss on the investment. Additionally, the Company evaluated the factors related to other than credit loss, which were determined to be immaterial to the condensed consolidated financial statements.

The Company reviews its impairments in accordance with the changes issued by the FASB to fair value accounting and the recognition and presentation of other-than-temporary impairments, 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 consolidated statement of operations. 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 the Company’s intent and ability to retain its investment for a period of time sufficient to allow for the recovery in market value to par. 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 near future, conclude that an additional other-than-temporary impairment charge is required related to these investments. Such other-than-temporary impairment may be greater than the $2.6 million currently accounted for as a temporary decline or may be greater than the $1.6 million other-than-temporary impairment recorded through December 31, 2010.

Note 10—Subsequent Event

On January 27, 2011, the Company acquired 100% of the business of Quadrem International Holdings, Ltd. for a purchase price of $168.6 million, including a working capital adjustment of $8.3 million and $10.25 million paid to a third party to modify and terminate certain aspects of a commercial arrangement previously entered into by Quadrem. The purchase price consists of (i) $82.3 million in cash, (ii) $61.3 million in Ariba stock and (iii) a $25.0 million contingent payment.

 

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The cash includes $40.0 million which will be deposited in escrow to satisfy potential indemnification claims. The contingent payment is subject to performance conditions. The performance conditions include, subject to certain terms and conditions, certain customers (i) making specified cash payments to Ariba and (ii) using the Quadrem network to facilitate purchasing and invoicing activities with respect to specified customers or business and/or operating units. If the performance conditions are met in full, after the third anniversary Ariba will pay an additional $25.0 million in cash or, at its election, Ariba stock, and release $25.0 million of escrow cash, to the extent such cash is not used to satisfy indemnification claims.

Quadrem developed and operates a global electronic marketplace to facilitate the procurement of goods and services by companies from their supplier communities. The Company believes the acquisition of Quadrem will enable us to further expand our network volume and reach, accelerate growth, and extend better commerce to more companies in more regions of the globe.

Goodwill related to the Quadrem acquisition consists largely of the synergies and further expansion and growth expected from combining the operations of Ariba and Quadrem.

Acquisition-related costs of $1.0 million were included in general and administrative expenses in Ariba’s condensed consolidated statement of operations for the three months ended December 31, 2010. Quadrem’s results of operations will be included in our consolidated financial statements from the acquisition date.

At the date of issuance of these condensed consolidated financial statements, the initial accounting for this business combination was not completed. As a result, the fair values of the contingent payment, assets acquired, and liabilities assumed, the amount of goodwill by operating segment, the amount of goodwill expected to be deducted for tax purposes and supplemental pro forma information has not been provided in this disclosure.

 

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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 collaborative business commerce solutions for buying and selling goods and services. Ariba combines industry-leading software as a service (“SaaS”) technology to optimize the complete commerce lifecycle and enables companies to discover, connect and collaborate with a global network of trading partners and expert capabilities to augment internal resources and skills, delivering services needed to control costs, minimize risk, improve profits and enhance cash flow and operations, all in the Ariba® Commerce Cloud. Over 340,000 companies, including more than 80 percent of the Fortune 500, use Ariba’s solutions to drive more efficient inter-enterprise commerce.

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 provided as a service in an on-demand model or deployed as an installed application. In addition to application software, Ariba’s collaborative business commerce solutions include implementation and strategic consulting services, education and training. Ariba’s collaborative business commerce 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 260,000 registered suppliers, offering a wide array of goods and services, are connected to the Ariba Supplier Network.

Business Model

Ariba Business Commerce 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.

We have aligned our business model with the way we believe customers want to purchase and deploy business commerce solutions. Customers may generally subscribe to our software products and services for a specified term 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 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

 

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software solutions are generally fixed for a specific period of time, and revenue is recognized ratably over the term. Similarly, maintenance fees are generally fixed for a specific period of time, and revenue is customarily recognized ratably over the maintenance term. 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 stable over time. 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. Individual subscription software license sales can be significant (greater than $1.0 million) and sales cycles are often lengthy and difficult to predict.

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 40% 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 subscription revenue versus services revenue would drive overall gross margin higher and vice versa.

Overview of Quarter Ended December 31, 2010

Our revenues increased to $90.4 million in the three months ended December 31, 2010 compared to $75.2 million in the three months ended December 31, 2009. Subscription and maintenance revenues increased $7.5 million, or 13% and services and other revenues increased $7.7 million, or 46%. Subscription revenues were $50.2 million in the three months ended December 31, 2010, as compared to $41.2 million in the three months ended December 31, 2009. This 22% increase is primarily due to an increase in the demand for our subscription software products and the continued growth of Ariba Supplier Network revenues. Services and other revenues increased $7.7 million primarily due to an increase in implementation revenue in the three months ended December 31, 2010.

Operating expenses increased to $55.9 million in the three months ended December 31, 2010 compared to $48.0 million in the three months ended December 31, 2009. The increase in operating expenses is primarily attributable to an increase in compensation and benefits expense related to an increase in sales and marketing headcount in the three months ended December 31, 2010. In summation, our total net expenses from continuing operations, including costs of revenues and other items, increased to $81.9 in the three months ended December 31, 2010 compared to $74.1 million in the three months ended December 31, 2009. Combined with the increase in revenue, this resulted in income from continuing operations for the three months ended December 31, 2010 of $8.5 million compared to $1.0 million in the three months ended December 31, 2009.

Income from discontinued operations increased to $33.6 million in the three months ended December 31, 2010 compared to $1.2 million in the three months ended December 31, 2009. The increase is primarily related to the gain of $38.7 million, net of tax, on the sale of our sourcing and business process outsourcing (“BPO”) services assets (collectively, our “Sourcing Services Business”), as described below. This increase was partially offset by the transaction related costs to dispose of our Sourcing Services Business including severance and professional services costs. As a result, our net income for the three months ended December 31, 2010 of $42.1 million compared to $2.2 million in the three months ended December 31, 2009.

On November 15, 2010, we sold our Sourcing Services Business to Accenture for approximately $51.0 million in cash, of which $12.0 million is subject to escrow. These assets include our category expertise, sourcing process expertise and strategic sourcing execution resources.

On January 27, 2011, we acquired 100% of the business of Quadrem International Holdings, Ltd. for a purchase price of $168.6 million, including a working capital adjustment of $8.3 million and $10.25 million paid to a third party to modify and terminate certain aspects of a commercial arrangement previously entered into by

 

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Quadrem. The purchase price consists of (i) $82.3 million in cash, (ii) $61.3 million in Ariba stock and (iii) a $25.0 million contingent payment. Quadrem developed and operates a global electronic marketplace to facilitate the procurement of goods and services by companies from their supplier communities. We believe the acquisition of Quadrem will enable us to further expand our network volume and reach, accelerate growth, and extend better commerce to more companies in more regions of the globe.

Outlook for Fiscal Year 2011

With the increase in customer demand and continued shift in demand toward subscription software sales, we expect continued growth in subscription revenue in fiscal year 2011 compared to fiscal year 2010. We also expect total revenues to grow in fiscal year 2011 compared to fiscal year 2010 at a higher growth rate than 2010 with growth in subscription revenue being partially offset by modest declines in maintenance revenues.

We plan to continue to carefully monitor expenses in fiscal year 2011. We expect that total expenses, excluding expenses for amortization of intangibles, stock-based compensation and restructuring costs, will grow at a lower rate than revenues. Our expense outlook includes targeted investments in our business designed to pursue revenue growth opportunities that are planned depending on economic conditions and operating results in fiscal year 2011. As a result of our revenue and expense outlooks, we anticipate continued improvement in our results from operations, before giving effect to these excluded expenses.

The current economic uncertainty may adversely impact our business. Although we believe that our business commerce solutions may be even more strategic to customers during adverse economic conditions, because they help companies reduce the costs of their goods and services, a weakening global economy, or decline in confidence in the economy, could, among other things, result in reduced revenues, impairment of financial and non-financial assets and reduced cash flows.

We believe that our success for fiscal year 2011 will depend largely on our ability to: (1) renew our subscription or time-based revenues, including on-demand software fees, maintenance fees, and fees for certain services; (2) sell bundled solution offerings that include both technology and expert services; (3) capitalize on revenue opportunities, such as increased fees for the Ariba Supplier Network and selling on-demand business commerce solutions to smaller and mid-market customers; (4) successfully manage the sale of our Sourcing Services Business; (5) successfully integrate and manage the acquired Quadrem business; and (6) retain and expand our workforce in the face of competitive hiring conditions in the technology sector.

In addition to the macro-economic impact, we believe that key risks to our revenues in fiscal year 2011 include: our ability to renew ratable revenue streams without substantial declines from prior arrangements, including subscription software, software maintenance and subscription services; our ability to generate organic growth; the market acceptance of business commerce solutions as a standalone market category; the overall level of information technology spending; 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; and our ability to maintain adequate utilization of our services organization. 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, 2010 filed with the SEC on November 23, 2010.

 

     Three Months Ended
December 31,
 
     2010     2009  

Revenues:

    

Subscription and maintenance

   $ 65,858      $ 58,373   

Services and other

     24,562        16,819   
                

Total revenues

     90,420        75,192   
                

Cost of revenues:

    

Subscription and maintenance

     14,290        12,674   

Services and other

     15,307        12,448   

Amortization of acquired technology and customer intangible assets

     1,025        1,327   
                

Total cost of revenues

     30,622        26,449   
                

Gross profit

     59,798        48,743   
                

Operating expenses:

    

Sales and marketing

     35,716        26,692   

Research and development

     12,492        11,146   

General and administrative

     10,610        10,012   

Amortization of other intangible assets

     —          104   

Restructuring benefit

     (2,923     —     
                

Total operating expenses

     55,895        47,954   
                

Operating income

     3,903        789   

Interest and other income (expense), net

     769        277   
                

Income before income taxes

     4,672        1,066   

(Benefit) provision for income taxes

     (3,812     17   
                

Income from continuing operations

     8,484        1,049   

Discontinued operations, net of tax:

    

(Loss) income from discontinued operations

     (5,104     1,176   

Gain on sale of discontinued operations

     38,719        —     
                

Total discontinued operations

     33,615        1,176   
                

Net income

   $ 42,099      $ 2,225   
                

Comparison of the Three Months Ended December 31, 2010 and 2009

Revenues

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

 

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Subscription and maintenance

Subscription and maintenance revenues for the three months ended December 31, 2010 were $65.9 million, a 13% increase from the $58.4 million recorded in the three months ended December 31, 2009. Subscription revenues for the three months ended December 31, 2010 were $50.2 million, a 22% increase from the $41.2 million recorded in the three months ended December 31, 2009. The increase of $9.0 million in subscription revenues was primarily due to an increase in the demand for our subscription software products and the continued growth of Ariba Supplier Network revenues due to increased volume and changeable relationships as well as modification of the pricing structure. Maintenance revenues for the three months ended December 31, 2010 were $15.6 million, a slight decrease from the $17.1 million recorded in the three months ended December 31, 2009 primarily due to a decline in perpetual license revenues. We anticipate that subscription revenues will increase in fiscal year 2011 compared to fiscal year 2010, partially offset by modest declines of maintenance revenues in fiscal year 2011.

Services and other

Services and other revenues for the three months ended December 31, 2010 were $24.6 million, a 46% increase from the $16.8 million recorded in the three months ended December 31, 2009. The increase is attributed to an increase in implementation revenues in the three months ended December 31, 2010. We anticipate that services and other revenues will increase in fiscal year 2011 compared to fiscal year 2010.

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 December 31, 2010 was $14.3 million, a slight increase from the $12.7 million recorded in the three months ended December 31, 2009. This slight increase is primarily the result of an increase in hosted support costs associated with the overall 22% increase in subscription revenues in the three months ended December 31, 2010. We anticipate that cost of subscription and maintenance expenses will remain relatively consistent as a percentage of subscription and maintenance revenues in the year ending September 30, 2011 compared to the year ended September 30, 2010.

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 December 31, 2010 was $15.3 million, a 23% increase from the $12.4 million recorded in the three months ended December 31, 2009. This increase is primarily the result of an increase in costs associated with the overall 46% increase in services and other revenues in the three months ended December 31, 2010. We anticipate that cost of services and other revenues will remain relatively consistent as a percentage of services and other revenues in the year ending September 30, 2011 compared to the year ended September 30, 2010.

Amortization of acquired technology and customer intangible assets

Amortization of acquired technology and customer intangible assets represents the amortization of assets associated with our fiscal year 2008 business combination with Procuri. This expense amounted to $1.0 million and $1.3 million in the three months ended December 31, 2010 and 2009, respectively. The decrease in the three months ended December 31, 2010 is primarily attributable to assets reaching the end of their estimated useful lives. We anticipate amortization of acquired technology and customer intangible assets will increase in the year ended September 30, 2011 compared to the year ended September 30, 2010 due to the acquisition of Quadrem.

Gross profit

Our gross profit as a percentage of revenues remained relatively consistent for the three months ended December 31, 2010 and was 66% compared to 65% for the three months ended December 31, 2009.

 

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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 December 31, 2010 were $35.7 million, a 34% increase from the $26.7 million recorded in the three months ended December 31, 2009. This increase of $9.0 million is primarily due to the following: (1) increased compensation and benefits costs, travel costs and recruiting costs of $5.0 million, $832,000 and $771,000, respectively, related to an increase in overall sales and marketing headcount in the three months ended December 31, 2010; (2) an increase in stock-based compensation of $904,000 related to performance-based awards based on the increase in subscription software revenues noted above; and (3) increased marketing expense of $577,000 in the three months ended December 31, 2010. We anticipate that sales and marketing expenses will slightly increase as a percentage of revenues in the year ending September 30, 2011 compared to the year ended September 30, 2010.

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 December 31, 2010 were $12.5 million, a 12% increase from the $11.1 million recorded in the three months ended December 31, 2009. This increase is primarily due to an increase in stock-based compensation of $486,000 primarily related to restricted stock awards and compensation and benefit costs of $472,000 in the three months ended December 31, 2010. We anticipate that research and development expenses will remain relatively consistent as a percentage of revenues in the year ending September 30, 2011 compared to the year ended September 30, 2010.

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 December 31, 2010 were $10.6 million, a 6% increase from the $10.0 million recorded in the three months ended December 31, 2009. This increase is primarily due to an increase in professional services costs of $1.5 million partially offset by an decrease in stock-based compensation of $1.2 million primarily related to restricted stock awards. We anticipate that general and administrative expenses will slightly increase as a percentage of revenues in the year ending September 30, 2011 compared to the year ended September 30, 2010.

Amortization of other intangible assets

Amortization of other intangible assets was $104,000 for the three months ended December 31, 2009. This amount consisted of the amortization of trade name/trademark resulting from our acquisition of Procuri. We anticipate amortization of other intangible assets will increase in the year ended September 30, 2011 compared to the year ended September 30, 2010 due to the acquisition of Quadrem.

Restructuring benefit

For the three months ended December 31, 2010, we recorded a net benefit to operating expenses of $2.9 million. In November 2010, we entered into an amendment with Juniper Networks, Inc. (“Juniper”), the successor in interest to NetScreen Technologies, Inc. (“NetScreen”) to the sublease dated as of October 18, 2002 between Ariba and NetScreen. Pursuant to the amendment, Juniper agreed to lease approximately 89,000 square feet of additional space at our Sunnyvale, California headquarters through January 2013.

 

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Interest and other income (expense), net

Interest and other income (expense), net for the three months ended December 31, 2010 was income of $769,000, compared to income of $321,000 recorded in the three months ended December 31, 2009. The increase is primarily attributable to the realized loss of $499,000 on one auction rate security during the three months ended December 31, 2009.

(Benefit from) provision for income taxes

The (benefit from) provision for income taxes for the three months ended December 31, 2010 was a $3.8 million benefit compared with $17,000 of expense in the three months ended December 31, 2009. The decrease is primarily attributable to an increase in releases of unrecognized tax benefits due to expiring statutes of limitations in foreign jurisdictions in the three months ended December 31, 2010.

Discontinued operations

Discontinued operations include all operating activities and the gain of our Sourcing Services Business. See “Overview of Quarter Ended December 31, 2010.” During the three months ended December 31, 2010, the operations of the Sourcing Services Business resulted in a loss of $5.1 million compared to a gain of $1.2 million for the three months ended December 31, 2009. The decrease is primarily attributable to transaction related costs to dispose of the business including severance and professional services costs. See Note 2, “Discontinued Operations” in the Notes to Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

As of December 31, 2010, we had $261.7 million in cash, cash equivalents and investments and $29.2 million in restricted cash, for total cash, cash equivalents, investments and restricted cash of $290.9 million. Our working capital on December 31, 2010 was $100.6 million. All significant cash, cash equivalents and investments are held in accounts in the United States. As of September 30, 2010, we had $223.1 million in cash, cash equivalents and investments and $29.2 million in restricted cash, for total cash, cash equivalents, investments and restricted cash of $252.4 million. Our working capital on September 30, 2010 was $54.8 million.

We hold a variety of interest-bearing auction rate securities (“ARS”) that represent investments in pools of assets, including student loans 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 continuing 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. Given the failures in the auction markets, as well as the lack of any correlation of these instruments to other observable market data, there are no longer observable inputs available as defined by Levels 1 and 2 of the fair value hierarchy by which to value these securities. Therefore, these auction rate securities are classified within Level 3 and their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities.

Contractual maturity dates for these ARS investments range from 2016 to 2047. The ARS backed by student loans are guaranteed by the U.S. government and have credit ratings of AAA to A. All of the ARS investments were in compliance with our investment policy at the time of acquisition and are investment grade quality, except for one credit derivative product.

 

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Currently, we have no intent to sell these ARS investments prior to recovery nor are aware of any factors that would make such a sale of the ARS investments more likely than not. As of December 31, 2010 and September 30, 2010, we classified the entire ARS investment balance as long-term investments on our consolidated balance sheet because of our inability to determine when our investments in ARS would settle.

Historically, 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 (“DCF”) to determine the estimated fair value of our investment in ARS as of December 31, 2010. Significant estimates used in the DCF models include the credit quality of the instruments, the types of instruments and an illiquidity discount factor. 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. The discount factor used for the $17.8 million of student loan securities and $3.4 million of a credit derivative product was adjusted by 150 basis points (“bps”) for the student loan securities and 1,100 bps for the credit derivative product, respectively, to reflect the then current market conditions for instruments with similar credit quality at the date of valuation and the risk in the marketplace for these investments that has arisen due to the lack of an active market for these instruments. Based on the assessment of fair value through December 31, 2010, we determined there was a decline in the fair value of its ARS investments of $4.2 million, of which $2.6 million was deemed temporary. As a result of the credit rating reduction to below investment grade related to one of our ARS, we recorded other-than-temporary impairments of $1.9 million, partially offset by $305,000 of accretion recorded through December 31, 2010. Based upon the analysis completed, we determined that the other-than-temporary loss of $1.6 million was principally related to the credit loss on the investment. Additionally, we evaluated the factors related to other than credit loss, which were determined to be immaterial to the consolidated financial statements.

We review our impairments in accordance with the changes issued by the Financial Accounting Standards Board (“FASB”) to fair value accounting and the recognition and presentation of other-than-temporary impairments, 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 consolidated statement of operations. 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 in the issuer for a period of time sufficient to allow for the 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, we may, in the future, conclude that an additional other-than-temporary impairment charge is required related to these investments. Such other-than-temporary impairment may be greater than the $2.6 million currently accounted for as a temporary decline or may be greater than the $1.6 million other-than-temporary impairment recorded in the three months ended December 31, 2010.

The valuation of our investment portfolio is subject to uncertainties that are difficult to predict. Factors that may impact our 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 to record all current and any future unrealized losses as a charge in our statement of operations 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.

 

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Our 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 modified our current investment strategy by limiting our investments in ARS to our current holdings and increasing our investments in more liquid investments.

Our largest source of operating cash flows is cash collections from our customers related to our hosted on-demand software solutions and fees for product updates and support, as well as fees paid by suppliers for the Ariba Supplier Network. We also generate cash inflows from services for implementation services, consulting services and license fees charged for the use of our software products under perpetual agreements. Our primary uses of cash from operating activities are for personnel related expenditures as well as payments related to leased facilities. Net cash provided by operating activities was $14.5 million for the three months ended December 31, 2010, compared to net cash provided by operating activities of $10.5 million for the three months ended December 31, 2009. Cash flows from operating activities increased primarily due to changes in working capital including an increase in cash provided by cash collections in the three months ended December 31, 2010 as compared to the three months ended December 31, 2009.

The changes in cash flows from investing activities primarily relates to acquisitions, dispositions and the timing of purchases, maturities and sales of our investments. Net cash provided by investing activities was $37.3 million for the three months ended December 31, 2010, compared to net cash used in investing activities of $9.0 million for the three months ended December 31, 2009. The increase of $46.4 million is primarily attributable the sale of our Sourcing Services Business to Accenture and an increase in maturities of investments, net of purchases of $8.1 million.

The changes in cash flows from financing activities primarily relate to the repurchase of common stock 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 and the proceeds from the issuance of common stock is attributed to stock option exercises. Net cash used in financing activities was $12.4 million for the three months ended December 31, 2010, compared to net cash used in financing activities of $5.0 million for the three months ended December 31, 2009. The decrease in the three months ended December 31, 2010 is related to an increase in the repurchase of common stock forfeited to Ariba by employees in satisfaction of statutory tax withholding obligations.

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.

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 non-cancelable purchase commitments as of December 31, 2010. There has been no material change in our contractual obligations and commercial commitments during the three months ended December 31, 2010 from those presented in our Annual Report on Form 10-K filed with the SEC on November 23, 2010.

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

 

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business plan. We anticipate that such operating costs, as well as planned capital expenditures, including those related to the Quadrem acquisition, 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 and our ability to manage infrastructure costs.

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

 

   

Recoverability of goodwill

 

   

Lease abandonment costs

 

   

Fair value of auction-rate securities

 

   

Allowance for doubtful accounts

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. There were no significant changes in our critical accounting policies and estimates during the three months ended December 31, 2010. Please refer 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, 2010 for a more complete discussion of our critical accounting policies and estimates.

 

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 have been and 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 each of the three months ended December 31, 2010 and 2009, 29% and 28%, 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.

 

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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 December 31, 2010 (in thousands):

 

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

Foreign Currency

          

Euro

    Sell         4,500       $ 6,085       $ 93   

Singapore Dollar

    Sell         7,500         5,720         (122

Chinese Renminbi

    Sell         35,000         5,287         (13

Indian Rupee

    Buy         75,000         1,690         (12

Czech Koruna

    Buy         22,000         1,264         (52

Swiss Franc

    Buy         1,200         1,244         40   

Brazilian Real

    Sell         1,000         586         (16

Australian Dollar

    Sell         500         500         (11

Japanese Yen

    Buy         —           28         (14
                      

Total

        $ 22,404       $ (107
                      

The unrealized gain (loss) represents the difference between the contract value and the market value of the contract based on market rates as of December 31, 2010.

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 $2.2 million. 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. See “Liquidity and Capital Resources.” All investments in the table below are carried at market value, which approximates cost.

 

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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
December 31,
2011
    Period Ending
December 31,
2012
    Period Ending
December 31,
2013
    Period Ending
December 31,
2014
    Period Ending
December 31,
2015
    Thereafter     Total  

Cash equivalents

  $ 178,711      $ —        $ —        $ —        $ —        $ —        $ 178,711   

Average interest rate

    0.38     —          —          —          —          —          0.38

Investments

  $ 15,706      $ 7,192      $ —        $ —        $ —        $ 17,027      $ 39,925   

Average interest rate

    1.08     1.06     —          —          —          1.92     1.44

Restricted cash

  $ 104      $ —        $ 29,137      $ —        $ —        $ —        $ 29,241   

Average interest rate

    0.50     —          0.50     —          —          —          0.50
                                                       

Total investment securities

  $ 194,521      $ 7,192      $ 29,137      $ —        $ —        $ 17,027      $ 247,877   
                                                       

The table above does not include uninvested cash of $43.0 million held as of December 31, 2010. Total cash, cash equivalents, marketable securities, investments and restricted cash as of December 31, 2010 was $290.9 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 December 31, 2010, 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.

As of December 31, 2010, management evaluated the effectiveness of our disclosure controls and procedures and concluded those disclosure controls and procedures were effective at the reasonable assurance level.

 

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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 December 31, 2010 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, 2010.

The Economic Downturn Adversely Impacted Our Business and May Continue to Adversely Impact Our Business Beyond Our Expectations.

Our business has been adversely affected by the credit crises and uncertain worldwide economic conditions. Although our business commerce solutions help companies reduce the cost of their goods and services and may therefore be perceived as even more strategic during adverse economic conditions, we experienced a challenging selling environment during the current economic downturn. Adverse economic conditions could, among other things, result in reduced revenues, increased operating losses and reduced cash flows from operations, greater than anticipated uncollectible accounts receivables and increased allowances for doubtful accounts receivable, impairment of financial and non-financial assets and increased restructuring charges.

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;

 

   

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.

The risks will be enhanced with our recently completed acquisition of Quadrem’s business. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” A substantial majority of Quadrem’s revenues are generated outside the United States and conducts business in Africa, Asia, Australia, Europe, the Middle East, North America and South America.

For international sales and expenditures denominated in foreign currencies, we are subject to risks associated with currency fluctuations. Since the majority of our non-U.S. sales are priced in currencies other than

 

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the U.S. dollar, a strengthening of the dollar may reduce the level of reported revenues. If such events continue to occur, our net revenues could be seriously impacted, since a significant portion of our net revenues are derived from international operations. We have partially hedged 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.

Our Success Depends on Market Acceptance of Standalone Business Commerce Solutions.

Our success depends on widespread customer acceptance of standalone business commerce 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 business commerce 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 December 31, 2010, 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:

 

   

declines in average selling prices of our products and services resulting from adverse economic conditions, competition and other factors;

 

   

failure to successfully grow our sales channels;

 

   

failure to maintain control over costs;

 

   

charges incurred in connection with any future restructurings or acquisitions; and

 

   

additional impairment charges as a result of the decline in value and credit quality of our investments in auction rate securities (“ARS”) or changes in the accounting treatment of these securities.

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;

 

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

 

   

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

Risks Related to Expenses:

 

   

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

 

   

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.

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. 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 have experienced and expect to continue to experience a decrease in the demand for our maintenance services, which is related to our CD business, as many new customers are purchasing our on-demand products and a small number of legacy CD customers are converting to on-demand products;

 

   

because we recognize revenue from subscription to our on-demand services over the term of the agreements, downturns or upturns in sales may not be immediately reflected in our operating results;

 

   

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

 

   

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

 

   

product quality issues may affect forecasted adoptions and renewals.

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

We have recorded significant restructuring charges relating to the abandonment of numerous leased facilities, including most notably portions of our Sunnyvale, California headquarters. For example, in the year ended September 30, 2010, we revised our estimates for sublease commencement dates based on the remaining terms of the lease in Sunnyvale, California and continued soft market conditions in the Northern California real estate market, resulting in a charge of $8.6 million. Additional lease abandonment costs, resulting from the abandonment of additional facilities could adversely affect our operating results.

Our Business Could Be Seriously Harmed If We Fail to Retain and Expand 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

 

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ability to retain and attract key employees may be harder given competitive hiring conditions in the technology sector and 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 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. We have experienced longer sales cycles as a result of the current economic downturn and more levels of required customer management approvals. 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.

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 and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Compliance with existing 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. The recently adopted Dodd-Frank Act will subject us to significant additional executive compensation and corporate governance requirements, many of which have yet to be implemented by the SEC. Compliance with their requirements may be costly and adversely affect our business.

We Sometimes Experience Long Implementation Cycles, Which May Increase Our Operating Costs.

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. 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

 

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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.

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 AG and Oracle. We also compete with several service providers, including A.T. Kearney and McKinsey & Company. In addition, we compete with smaller specialty vendors or smaller niche providers of sourcing or procurement products and services, including Emptoris, BravoSolution, Zycus, American Express S2S, Perfect Commerce, cc-Hubwoo, Ketera Technologies, Coupa and Iasta. Because business commerce is a relatively new software and solutions 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 business commerce solutions that are included as part of broader enterprise application solutions at little or no cost to their customers. 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

 

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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.

Any Current or Future Acquisitions or our Recently Announced Disposition Will Be Subject to a Number of Risks.

Any current or future acquisitions or disposition will subject us to a number of risks, including:

 

   

the diversion of management time and resources;

 

   

the difficulty of assimilating/transitioning 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;

 

   

the inability to sell disposed assets;

 

   

potential unknown liabilities associated with acquired businesses; and

 

   

impairment of goodwill and other assets acquired or divested.

Our sale of certain of our sourcing services to Accenture on November 15, 2010 could adversely impact our business because, among other reasons, many of our existing customers will continue to require these services and our solution offering may be less attractive to potential customers without our ability to provide these services. See “Management’s Discussion of Analysis and Financial Condition”

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

We entered into an agreement to acquire Quadrem with the expectation that the acquisition will result in various benefits including, among other things, accelerating our penetration into the international market segments, 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. Quadrem’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 Quadrem 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;

 

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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.

Litigation Could Seriously Harm Our Business.

There can be no assurance that 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 “Litigation” in Note 4 of Notes to the Condensed Consolidated Financial Statements.

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

We hold a variety of interest bearing 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 continuing 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 ARS, along with the rest 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 are not soliciting offers to sell these ARS investments prior to recovery nor are aware of any factors that would make such a sale of the ARS investments more likely than not, 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 to record all current and any future unrealized losses as a charge in our statement of operations in future quarters. See Note 9—Fair Value of Our Notes to Consolidated Financial Statements for additional information about the potential adverse impact of our investments in ARS.

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

 

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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. The balance of goodwill is $394.7 million as of December 31, 2010 and, there can be no assurance that future goodwill impairments will not occur.

We May Fail to Achieve Our Financial Forecasts Due to Inaccurate Sales Forecasts and Other Factors.

Our revenues are difficult to predict and, as a result, our quarterly financial results can fluctuate substantially. We estimate quarterly revenues in part based on our sales pipeline, which is an estimate of potential customers, their stage of the sales process, the potential amount of their sales contracts and the likelihood that we will convert them into actual customers during the quarter. To the extent that any of these estimates are inaccurate, our actual revenues may be different than our forecast revenues.

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, including those discussed in other risk 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;

 

   

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 subscription 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 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 53 patents issued in the United States of America, 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 of America 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.

 

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There has been a substantial amount of litigation in the software industry and the Internet industry regarding intellectual property rights. It is possible that in the future, 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, divert management’s time from developing our business, cause product shipment delays, require us to enter into royalty or licensing agreements or require us to satisfy indemnification obligations to our customers. Royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could seriously harm our business.

In addition, we may need to commence litigation or take other actions to protect our intellectual property rights. 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 attacking the validity and enforceability of our intellectual property rights.

We May be Sued by Third Parties for Alleged Infringement of Their Proprietary Rights.

There is considerable patent and other intellectual property development activity in our industry. Our success depends upon our not infringing upon the intellectual property rights of others. Our competitors, as well as a number of other entities and individuals, may own or claim to own intellectual property relating to our industry. Even though we have policies against our unauthorized use of third party intellectual property rights and we take precautions not to use such intellectual property without the proper licenses, from time to time, third parties have claimed and may in the future claim that we are infringing upon their intellectual property rights, and we may be found to be infringing upon such rights. In the future, we may receive claims that our application suite and underlying technology infringe or violate the claimant’s intellectual property rights. However, we may be unaware of the intellectual property rights of others that may cover some or all of our technology or application suite. Any claims or litigation could cause us to incur significant expenses and, if successfully asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our technology or services, or require that we comply with other unfavorable terms. We may also be obligated to indemnify our customers or business partners in connection with any such litigation and to obtain licenses, modify products, pay royalties, or refund fees, which could further exhaust our resources. In addition, we may pay substantial settlement costs to resolve claims or litigation. Even if we were to prevail in the event of claims or litigation against us, any claim or litigation regarding our intellectual property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.

We Rely on Third-Party Technology for Our Solutions which Might Not be Available to Us in the Future.

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. 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 or require us to satisfy indemnification obligations to our customers. These delays, if they occur, could adversely affect our business.

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.

 

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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.

Because our application suite collects, stores and reports personal information of buyers and suppliers, privacy concerns could result in liability to us or inhibit sales of our application suite.

Many federal, state and foreign government bodies and agencies have adopted or are considering adopting laws and regulations regarding the collection, use and disclosure of third-party information. In addition to government regulation, privacy advocacy and industry groups may propose new and different self-regulatory standards that apply to us. Because many of the features of our application suite collect, store and report on information about buyers and suppliers, any inability to adequately address privacy concerns, even if unfounded, or comply with applicable privacy or data protection laws, regulations and policies, could result in liability to us, damage our reputation, inhibit sales and harm our business.

Business Disruptions Could Affect Our Operating Results.

A significant portion of our research and development activities and certain other critical business operations is concentrated in a few geographic areas. We are a highly automated business and a disruption or failure of our systems could cause delays in completing sales and providing services. A major earthquake, fire or other catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be materially and adversely affected.

Defects or Disruptions in Our Solutions Could Diminish Demand for Our Solutions and Subject Us to Substantial Liability.

Since our customers use our solutions for important aspects of their business, any errors, defects, disruptions in service or other performance problems with our solutions could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect to terminate or not to renew their subscriptions, delay or withhold payment to us, or make warranty or other claims against us. In addition, it could adversely affect our ability to attract new customers. Our business will be harmed if our customers and potential customers believe our solutions are unreliable.

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.

 

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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 December 31, 2010.

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
 

October 1, 2010—October 31, 2010

    —        $ —          —          —     

November 1, 2010—November 30, 2010

    614,814        20.67        —          —     

December 1, 2010—December 31, 2010

    4,314        21.61        —          —     
                         

Total

    619,128      $ 20.68        —          —     
                         

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 5. Other Information

Not applicable.

 

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Item 6. Exhibits

 

Exhibit

No.

  

Exhibit Title

  2.5          Stock Purchase Agreement, dated November 18, 2010, among the Registrant, Quadrem International Holdings, Ltd. and Charlotte, Ltd., as stockholders’ representative.
10.45        Second Amendment to Sublease, dated as of December 8, 2010, by and between Juniper Networks, Inc. and the Registrant.
10.46‡†    Ariba, Inc. 1999 Equity Incentive Plan: Notice of Stock Unit Award and Agreement (FY 2011 Performance Stock Units), by and between Ariba, Inc. and Ahmed Rubaie.
10.47‡†    Ariba, Inc.: 1999 Equity Incentive Plan: Notice of Stock Unit Award and Agreement (FY 2011 Performance Stock Units), by and between Ariba, Inc. and Kent Parker.
10.48‡†    Ariba, Inc. 1999 Equity Incentive Plan: Notice of Stock Unit Award and Agreement (FY 2011 Performance Stock Units), by and between Ariba, Inc. and Kevin Costello.
10.49‡†    Ariba, Inc. 1999 Equity Incentive Plan: Notice of Stock Unit Award and Agreement (FY 2011 Performance Stock Units), by and between Ariba, Inc. and Robert Calderoni.
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.
101          Interactive Data Files pursuant to Rule 405 of Regulation S-T (XBRL)

 

Management contract or compensatory plan or arrangement.
A request for confidential treatment has been filed with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

 

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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/    AHMED RUBAIE        

  Ahmed Rubaie
  Executive Vice President and Chief Financial Officer
  (Principal Financial and Accounting Officer)

Date: February 3, 2011

 

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