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Executives

Bob Calderoni - Chairman, Chief Executive Officer and Member of Equity Incentive Committee

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

John Duncan - Director of IR and Corporate Finance

Analysts

Stan Zlotsky - Deutsche Bank AG

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Peter Goldmacher - Cowen and Company, LLC

Richard Williams - Cross Research LLC

Lauren Choi

Bradley Sills - Barclays Capital

Gregory Dunham - Crédit Suisse AG

Ariba (ARBA) Q3 2011 Earnings Call July 28, 2011 5:00 PM ET

Operator

Greetings, and welcome to the Ariba Third Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Duncan, Senior Director and Investor Relations for Ariba. Thank you. Mr. Duncan, you may begin.

John Duncan

Good afternoon, and welcome, everyone to Ariba's conference call to discuss the results for the third quarter of fiscal year 2011. In today's call, we'll make reference to supplemental presentation slides with our prepared remarks. To access these slides, please log on to the Investor Relations section of our website at www.ariba.com. Our speakers for the call today are Bob Calderoni, our Chairman and Chief Executive Officer; and Ahmed Rubaie, our Chief Financial Officer.

For those on the call accessing the supplemental presentation, please now advance to Slide 2. Before we begin, I will read the Safe Harbor statement. Statements that may be made on this call on the supplemental slides that are not historical facts may be forward-looking statements, including statements regarding the company's or management's intentions, hopes, beliefs, plans, expectations or strategies for the future.

These statements are subject to various risks and uncertainties and actual results could differ materially from the company's current expectations. These risks and uncertainties that are discussed in the company's SEC filings, including our most recent quarterly report on Form 10-Q filed on May 6, 2011, for the quarter ended March 31, 2011.

During the course of this call, we will reference historical non-GAAP financial measures. The management reviews non-GAAP financial information in evaluating Ariba's historical and projected financial performance and believes that it may assist investors in assessing its ongoing operations.

The presentation of this additional information is not meant to be considered in isolation or as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. For a reconciliation of historical non-GAAP to GAAP financial measures, please see the earnings press release and supplemental analysis on the Investor Relations section of our website at www.ariba.com or our Form 8-K filed this afternoon.

In addition, we will reference certain forward-looking non-GAAP financial information, including fiscal year 2011 revenues, expenses and net income. We are unable to reconcile this forward-looking non-GAAP financial information to corresponding forward-looking GAAP measures because we are unable to estimate without unreasonable efforts certain forward-looking GAAP revenue, expense and other income items.

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

Ahmed Rubaie

Thanks, John. Good afternoon, everyone, and thank you for joining us today. I am pleased to report Ariba delivered another very solid quarter with strong growth of momentum on all fronts, and particularly our network business. We exceeded our revenue outlook once again, with strength in both the Ariba and Quadrem parts of our business. We also hit the top end of our EPS guidance, while continuing to invest in the business for future growth.

Now let me walk you through the highlights of the third quarter. As a reminder, all results on today's call only refer to continuing operations. Additionally, and but for specific comments, we will not separate our Quadrem results as we are quickly integrating them into our business.

Please turn to Slide 3. We had another strong bookings quarter and annualized Subscription Software backlog increased to $186 million from $183 million last quarter, representing a 32% year-over-year total growth with organic growth at 23%. As a reminder, typically Q3 backlog is seasonally flat to only slightly up. Whether selling more P2P or invoice automation deals, we see increasing validation of the market moving to automated business collaboration with Ariba as a formidable business commerce network.

I have said to you a couple of quarters ago that I will continue enhancing our metrics as we continue the journey of becoming more of a network company with on-demand solution offerings. And today, I'm going to enhance our network trailing 12 months volumes metric. Historically, we had used purchase order volumes as the basis for this metric. This number rose to $186 billion, up from $180 billion last quarter, representing a 22% year-over-year growth.

Today, we are increasingly capturing more e-invoices that don't have a field associated with them, and this also generates supplier fees. Including non-PO e-invoices, our network volumes were $193 billion for the trailing 12 months, and were up 23% year-over-year. We see e-invoice automation as the key growth area, which will enable us to capture even more of our customers spend, including more complex non-PO spend categories such as business services.

In conclusion, going forward, we will focus on total spend throughput included non-PO e-invoices.

Please turn to Slide 4. Our Subscription Software revenue for the quarter was $76.4 million, up 74% year-over-year and up 27% organically, which was well ahead of our guidance. Within this number, Network revenue was $37.2 million, up 249% year-over-year including 63.5% organic growth.

Our chargeable relationships rose to approximately $83,000, up $4,000 from Q2 and $22,000 year-over-year, a 35% increase. The continued increase in volumes and chargeable relationships will translate to higher Network revenues down the line. Additionally, our renewal rates have been solid.

By the way, the other team that you have seen play out this year and expect more to come next year is our ability to convert more traditional maintenance revenue to network and other subscription software applications. After this analysis, that services is only complimentary to our network and software business, and you reach the conclusion that our recurring network and software revenue is the driver of our business model.

On to the balance sheet. We generated $26.6 million of operating cash flow before lease loss. This translates into an operating cash flow margin of approximately 22%. Including lease loss of $4.2 million, Q3 net cash flow was $22.4 million. Now let me turn to more specific financial results for the June quarter. Please see Slide 6. Total revenue was $121.9 million for the third quarter, well ahead of our previous guidance range of $113 million to $115 million. Subscription and maintenance revenue was $91 million, leading our previous guidance of $87 million to $89 million. Subscription Software revenue was $76.4 million, ahead of our guidance of approximately $73.5 million, and again up 74% year-over-year incorporating 27% organic growth.

Maintenance revenue was $14.7 million, ahead of our previous guidance of $14.5 million.

Services and other revenue was $30.9 million, well ahead of our previous guidance of $26 million, plus or minus $1 million. Q3 included accelerated delivery of one-time milestone revenue of $4 million. As you know service is only complimentary to our network in software offerings, and accelerated customer timing means a faster road to more subscription software revenues. Consistent with prior quarters, my expectation of the underlying run rate of our services business continues to be in the range of $25 million to $27 million per quarter.

Turning to expenses, total expenses on a GAAP basis including cost of revenue were $134.2 million. Included in these GAAP results were an $18.3 million charge for stock-based compensation and amortization of intangible assets and $13.4 million in restructuring costs including accelerated depreciation related to vacating the campus in Sunnyvale as discussed on the last earnings call. Excluding these items, non-GAAP expenses were $102.5 million for the quarter. As a result, GAAP net income for the third quarter was a loss of $12.3 million or $0.13 per share.

On a non-GAAP basis, we had net income of $19.4 million or $0.20 per share coming in at the high-end of our EPS range of $0.18 to $0.20.

Moving on to the balance sheet, DSO was 27 days, slightly higher than the 24 days last quarter due to a higher mix of Quadrem receivables. Remember that Quadrem's business is predominantly in the southern hemisphere where DSO is traditionally higher. Our cash balance increased to $266.6 million from $252.3 million last quarter. Also ahead of our expectations.

Cash now represents approximately $2.76 per diluted share. Deferred revenue of $134.5 million trends it down to $7.8 million sequentially, which was slightly better than expected. This reflects the normal seasonal decline in maintenance and supplier fees due to the timing of renewals and also the acceleration of services revenue in Q3. Year-on-year, it is up by approximately $20 million.

Let's turn to our EBIT outlook for fiscal year 2011, please see Slide 7. Based on our year-to-date results and strong momentum, we are raising our full-year revenue guidance for both subscription software and services by a total of $12 million to a range of $339 million and $441 million. Approximately $38 million higher than expectations at the beginning of the year due to the continued strong growth in our business.

Subscription Software revenue increases by $7 million from our previous range of $264 million to $268 million to now $272 million to $274 million. Representing 26% year-over-year organic growth up from 24%.

Within this number, we increased the Network revenue to $116 million to $118 million from our previous guidance range of $109 million to $111 million. This now reflects 58% organic growth, up from our previous estimate of 50%.

Turning to Maintenance revenue, we are maintaining our forecast of $59 million for the year and are pleased with the conversions we have executed to date, $4 million of which is reflected in our fiscal year '11 guidance and more to come in fiscal year '12. We are raising our services revenue guidance by $5 million, taking our guidance from $103 million, plus or minus $5 million, to a range of $107 million to $109 million. To reiterate, services is less predictable than our recurring revenue stream, and as pointed out earlier, the underlying run rate of this business is approximately $25 million to $27 million per quarter.

As you can tell by the backlog and continued revenue rates as to date, our investments are paying off. The focus is on growing the network and our software solutions. We are investing in Quadrem to give them capabilities to sell our broader on-demand solutions into their customer base. At the same time, we are investing in Ariba resources to position our new emerging market capabilities to our North America and European customers. Of course we will continue to run our business with operational discipline and still expect non-GAAP EPS to be in the range of $0.78 to $0.80, narrowed from our previous range of $0.77 to $0.81.

Based on stronger than expected cash flows year-to-date, we are also raising our operating cash flow before lease loss estimate to $90 million representing growth of approximately 25% on last year's $70 million.

In June, we launched a pricing model for Discovery and although it is in the very early stages, we are encouraged by the initial activity level.

The pricing model is still being tested in the market and as we have previously discussed, there will be minimal revenue impact in the foreseeable future as it will take time to build.

Turning to Q4, we expect the following: Total revenue in the range of $118 million to $120 million; subscription and maintenance revenue of approximately $92.5 million, plus or minus $1 million; including roughly $79 million for subscription software and $13.5 million for maintenance. We expect services and other revenue of approximately $26.5 million, plus or minus $1 million; with respect to the rest of the P&L, we expect total non-GAAP operating costs and expenses to be approximately $97.5 million. Contained within this are costs of revenue of approximately $37 million, R&D of roughly $14 million, sales and marketing of approximately $34.5 million, G&A of roughly $10.5 million. And in addition, we expect a net impact from interest, taxes and FX of approximately $1.5 million in expense.

On a non-GAAP basis, we expect positive net income of roughly $21.5 million, plus or minus $1 million, or approximately $0.22, plus or minus $0.01, based on approximately 98.2 million diluted shares outstanding. In addition, we expect to record expenses of roughly $21 million for stock-based compensation and amortization of intangible assets including Quadrem.

As discussed on the last call, our engineering team has now completed the move into our new facility in Sunnyvale, California. To recap, we are occupying only 2 floors out of 16 in the old Sunnyvale campus, while the majority of the other floors are sublet. In addition to closing the final chapter on the legacy real estate, we will have a more appropriate space with operational savings of approximately $3 million per annum going forward.

By the way, since we signed the new lease, the price per square foot has already seen quite an uplift in the Silicon Valley area. We are very happy that we got ahead of the curve and locked up a price while the real estate market was still weak in Silicon Valley. Of course, in January 2013, we will seal the book on legacy real estate when the original lease finally expires.

Like the last few quarters, I thought I would give you what else is on the horizon, while I believe the seasonality of deferred revenue is now widely understood. I would reiterate that in our case, it turns on cash collection. The real seasonality driver is the supply of membership and maintenance fees, the bulk of which are collected in the first half of the year. This means the deferred balance goes up in the first half of the year and then gradually goes down in the second half of the year. Only to go back up again in the first half of the following year. I expect the same trend to continue through Q4 as it did in prior years. As always, if you're looking for a barometer of future revenue, you should focus on the subscription software backlog strength, as well as the continued revenue growth. We have already raised revenue again by $38 million since December.

Moving on to Analyst Day this year, it will be held on September 8th at the Western Boston Waterfront. We are still planning the event, but you should expect to focus to be on our growth journey as the world's business commerce network and the long-term financial model.

In summary, I'm very pleased with our progress and the expansion of our network as we integrate Quadrem and build Discovery, all the while delivering above expectation organic growth. More importantly, I am confident that we are in a leading position to help companies leverage the network enterprise and better navigate their businesses in the macroeconomy.

And with that, let me turn the call over to Bob.

Bob Calderoni

Thanks, Ahmed. I'm also very pleased with our performance once again this quarter. There remains plenty of momentum in our business and that has allowed us to again exceed revenue expectations in the quarter and it's permitting us to once again raise the bar for the full-year revenue projections. This marks the third time we've raised our expectations for the year and have put us on track for what would be a tremendous fiscal year when the books are closed 90 days from now.

This momentum is coming from 3 things: first, the investments we have been making in the business; second, the strength of our network; and third, the strength in our business with Quadrem. Let me focus my comments on each of these drivers.

On the investment side. We have been on a path for the past 18 months to reinvest in the upside in our business in sales and marketing. A big part of that investment was increase our sales capacity in related skill sets, in pre-sale and demand generation. We have taken our quota-carrying sales reps up from a low of 77 to 120 today. We have also led a capacity to our demand creation organization who have done a terrific job building pipeline and feeding the new sales reps with more and more qualified opportunities. All of this is working well as evidenced by the building pipeline we see in our business, the building backlog of Subscription Software, and of course in the growth we see in both our bookings and revenues. This reinvestment strategy is working and it's something we're continuing with given past results.

The second driver of our momentum is the strength of our network. We set out to be the de facto standard business commerce network across the globe. It's a bold vision but we're making great strides against our goal. We've been putting a lot of distance between ourselves and anyone else who thinks they're in the business, commerce network business. We are simply connecting more buyers with more trading partners than any other B2B network on the planet.

This quarter was an outstanding quarter for our network. Network revenues were $37 million, up more than $8 million quarter-to-quarter, and triple what it was just a year ago. If you recall, it was not long ago when I would say we were on the path to transition from being a software company with a network, to a network company with software. And today, we're on the verge of crossing over the point where network revenue is more than 50% of our subscription revenue. Not long ago, comments were made that our network was interesting, but still a small part of Ariba, but today our network revenue should end the year with more than $115 million of revenue. We see solid spend at our network with 23% growth over the trailing 12 months. We see solid growth in the important underlying metrics like spend, number of documents and number of relationships. In fact, this quarter was one of our largest in terms of adding new transacting relationships. And with all of these signs of strength, I still look around the business and I see even more opportunity in many things that I know we can do better and improve in our execution going forward, especially around adoption and helping our customers capture even more of their spend and invoices onto the network.

And this goes not only for those customers who use our solutions, but it's also true for those using ERPs or other niche solutions who we believe we can help get more of this spend and invoice connected and automated with more best suppliers.

This is a big focus for us internally and it's something we are working on as we put our plans together for next fiscal year. Today we've got a great job getting the sales engine geared up and looking forward, we will put more focus on improving our execution around the deployment and adoption with the goal of capturing even more of our customer spend sooner and faster. More of that later after we complete our operating plans.

The third driver of our growth is the strength in the Quadrem business. It's only been 6 months since we closed that acquisition and yet I am very pleased with its performance and its contribution to Ariba. We are doing better than our initial business case with some solid growth in that part of the business, and beyond just beating our expectations on revenue, we're learning a lot from them about how we can improve upon what we do in the traditional part of our business and our network. And we're already seeing some early wins with some software sales in new markets in the Southern Hemisphere. This quarter, we had our first 2 sales of Ariba software to customers in Brazil, and while this is really just the beginning, the fact that it's happening already gives us confidence that there's a market for Ariba solutions in both these territories and in their customer base, which of course is one of the upsides we contemplated when we did the deal 6 months ago. Overall, I would say we are on track from an integration plan point of view, and all signs right now related to Quadrem are positive.

So overall the performance we have been experiencing in our business is reflective both of the markets increasing demand for better inter-enterprise collaboration and our stated strategy to enable and support the demands of this new network enterprise.

Underlying our solid performance, this quarter was our second consecutive quarter of record new customer additions, lending a new high of 50 new name logos. A large segment of this wins included our Ariba Network connectivity and network-based solutions like PO and invoice automation, signaling more buyer and seller nodes, which as you know, will yield more network volume in the future. Peeling back the layer in these wins further reveals an important dynamic that is unique to Ariba. These wins were not only the result of head-to-head competition against both niche and large ERP providers, but they also are reinforcement of our strategy to extend the value of many of the solutions offered by these competitors. More and more, we're finding companies turning to Ariba's network-based solution to extend their on-premise or ERP-based purchasing and AP environments to capture more spend and automate more aspects of buyer-seller collaborations.

Our combination of proven on-demand solutions integrated with the largest business commerce network is fueling wins across the board from big SAP shops such as DirecTV to Oracle houses like Corinthian Colleges, all of which are expected to add new nodes and new volume to our network.

Our solution breadth and our network coverage is also building wins against industry specialists. This was the case with fast growing -- one of the fast-growing biotech companies, Human Genome Sciences, who selected Ariba P2P over both ERPs and niche providers, and similarly one of the nation's largest health care companies selected Ariba for both procurement content and PO and invoice automation.

This combination of on-demand solutions and a broad network is fueling a growing number of takeaways as companies are reconsidering their purchasing AP programs and infrastructure. That was the case with the American Red Cross and Oracle shop, where a procurement at AP jointly selected Ariba to automate and streamline their Procure-to-Pay process, and another long-time licensee of SAP SRM in the spirits industry, they selected Ariba P2P due to our ability to enable Spend Management and procurement compliance, and over in Europe, Swedish steel giant, SSAB, selected the entire Ariba suite including P2P for global Spend Management deployed over their existing ERP systems.

We're also seeing an expansion in the number of connections and the types of collaborations buyers and sellers are doing through Ariba, and I think this is especially true with Ariba Discovery. We're seeing an increasing number of our sourcing customers, spot-buy purchasers and walk-up users, use this service to find new sources of supply. We're encouraged by the growth and speaking of Discovery, we rolled out a pricing model for Discovery last month. And as we said in the past, while we're not expecting to generate any meaningful revenue just yet, in fact, we're going to likely alter our pricing model a few times over the next few quarters to get some feedback and figure out the best approach for long-term monetization. The key thing is our focus today will be on building awareness and traction with buyers and sellers so that we have a good foundation to monetize Discovery into a more meaningful way in the not-so-distant future.

With that said, activity on the site continues to rise. The number of full postings and eIntros this quarter were higher than ever in both quantity and dollars and the number of suppliers registered on Discovery continues to climb and now tops 596,000 global suppliers.

So with that, let me open the call up for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Our first question comes from the line of Peter Goldmacher from Cowen and Company.

Peter Goldmacher - Cowen and Company, LLC

Bob or Ahmed, I'm hoping you can give a little more color around what you're seeing in the end market, particularly around the Network. You guys have been talking about the Network forever. It seems to me, going to some of your user conferences and other marketing events, that you're starting to get an end market that's becoming more receptive. I don't want to say the flywheel is really turning, but it does, it does seem to be gaining momentum. You're also seeing more competition in the market particularly SAP has made a strategic initiative. Are you feeling like the amount of attention in the end market is growing, and that's part of the reason for your success that you don't have to evangelize and push any more? And if you, can you give us some concrete example or 2?

Bob Calderoni

Yes, Peter, I think that flywheel is starting to turn, I don't want to suggest that it's spinning just yet as quickly as it can, but the flywheel is certainly starting to turn. Now in the past we were outsourcing software and the network was one of the enablers to help us win software deals. I think today, there is a growing recognition of what a B2B commerce network can actually do and rather than it following a software opportunity, there are opportunities that are really initiating today because of the network. So I think that's fueling some of the growth in booking. So it's opening up new doors perhaps on accounts where maybe they weren't in the market by any procurement related software, because they thought they already had what they needed. So I think that's certainly adding a second market opportunity for us, if you will. And there was a time when I think we had to evangelize that, and I don't want to suggest it's going to sell on its own today, but I think it's less of evangelizing and more execution right now. So it feels like some good momentum in that part of the business. As you can see in the results.

Peter Goldmacher - Cowen and Company, LLC

And what about the competitive environment?

Bob Calderoni

I think, I really don't see any change in the competitive environment. I hear noise, but I don't see anything. What I see as we're increasing our backlog at a faster rate. We're increasing the number of new customers at a faster rate. We're increasing the spend in the network , the number of suppliers at a faster rate. And I look at the results, and the only thing I could see is the result of some of these would-be competitors, the last couple of quarters, it was either flat subscription revenue or I think this quarter look like it was down 1% subscription revenue. So the noise that's out there isn't matched by the performance that's out there. We feel very good, and if you ask me, our competitive position, I feel like it's widening, not closing.

Peter Goldmacher - Cowen and Company, LLC

Just one quick model question for Ahmed, I want to make sure I heard it right. Did you say that for the next -- for pretty much every quarter from here on out we should, first, for fiscal '13, we should think about $25 million to $27 million a quarter in services?

Ahmed Rubaie

I think that's right, Peter. We're just starting our plan for fiscal year '12. I'm not ready to give you guidance. But I think suffice to say if I was doing the model, I would assume $25 million to $27 million until further notice.

Peter Goldmacher - Cowen and Company, LLC

If you were doing the model?

Ahmed Rubaie

That's right.

Operator

Our next question comes from the line of Greg Dunham with Crédit Suisse group.

Gregory Dunham - Crédit Suisse AG

I want to follow-up on the shrink, my mind tells me I guess 32% organic, bookings growth and the 50 new customers is probably the largest new customers you've ever had. Is the profile of that customer the same as it's been over the years?

Bob Calderoni

You want to take the organic growth comment, Ahmed, and I'll...

Ahmed Rubaie

Well, Greg, I think you do imply bookings. So I think the implied bookings, if you take the delta and the revenue come up with $39 million. If that that's what you're doing to calculate your 32%, then that's probably right.

Bob Calderoni

I could say, the bookings, we don't disclose specific bookings, but bookings strength is there. We see pretty solid bookings across all parts of our business whether it be in the Quadrem business or the Ariba business, whether it be U.S. or Europe or the Southern Hemisphere or if we look at it by product network versus non-network. Pretty consistent strength across all of those different ways of looking at it, clearly some markets are stronger than others but we're seeing good growth in all markets right now.

Gregory Dunham - Crédit Suisse AG

I mean, but in terms of the size of the customer, is it pretty much the same as it has always been? And then a follow-up, I know you're going to get into the extended option stuff later at Analyst Day, but can you give us a sense of the timing of how those initiatives then drive revenue over time?

Bob Calderoni

Yes, so on the customers, the 50 new customers that is a record number as far back as I can recall. Certainly I don't recall the pre-2000 years, but certainly in 10 years, that I’ve been around 50 customers is a record for us in a quarter. The types of customers, I think the types of customers have been similar in the last couple of years since we went on-demand. We started to see -- we still get large customers, but we -- every quarter also getting a number of companies in the $1 billion to $5 billion range and that's something we never, really $1 billion to 10 billion is something we never used to get pre-SaaS. So still getting large companies and part of the growth in the absolute number is our solution are relevant to smaller companies today, and that's enabled us to grow and expand revenue, expand the number of customers, expand the size of the network. And we're going to continue to work and try to make our solutions relevant for even smaller companies over time as well to expand that market even further.

Ahmed Rubaie

I would just add to that, Greg. The other noticeable point in the profile is increasingly every quarter, there are more downstream deals, and obviously the destination is all going to the network. So that's what keeps us very excited.

Operator

Our next question comes from the line of Tom Ernst from Deutsche Bank.

Stan Zlotsky - Deutsche Bank AG

It's actually Stan Zlotsky sitting in for Tom. How much of supplier price increase has already been filtered, excuse me, how many of the suppliers have taken up the price increase, what percentage of that?

Bob Calderoni

More than 80% of our supplier relationships have renewed to date. The renewal rate is very high, but I mean the 80% of the contract have been up for renewals, so we're pretty far into it.

Stan Zlotsky - Deutsche Bank AG

Is the renewal rates still around in or above 95%? I think it goes on like I think 95%, 97%?

Bob Calderoni

Yes. That is a little bit better than the past years and it's holding up there. A little bit better in the past years and a little bit better than we modeled it at the beginning of the year.

Stan Zlotsky - Deutsche Bank AG

Okay, so I know there's usually, but there's a lag between customers taking on the price increase and how that actually flows through into the income statement. So out of the 80%, how much of that you think has already been flown into the P&L statement?

Bob Calderoni

I don't know, Ahmed, if we can answer that.

Ahmed Rubaie

Yes, Stan, we can take that on a one-to-one, we just arrived, we don't have it handy.

Stan Zlotsky - Deutsche Bank AG

Okay, that's fine. So if I could just go back to services for just one second, so it looks like in this quarter though there was this bump in services, was that anything specific? And also on services, how are services helping to grow your subscription revenue?

Ahmed Rubaie

So, Stan, we accelerated our revenue into the quarter. In fact, we did something very similar last year and it's basically by customer demand. So there is certain milestone revenue in our services that we were able to pull forward. And how is it helping our business is very simply a lot of the work we do today is either helping enable the solutions we're selling or helping get on the network. So if customers are pushing to get better adoption quicker, that translates to higher subscription Network revenue as we go forward.

Stan Zlotsky - Deutsche Bank AG

Okay then last one, Maintenance revenue, I understand it's going down because people are migrating to SaaS solutions, any anecdotes you guys have or any stories about customers moving off of the legacy CD and moving on to the SaaS solutions? And how maintenance, I guess, I'm not sure it's going to be trending down, but are you seeing a pickup in people moving to SaaS, or is it just, how it's been in the past few quarters?

Bob Calderoni

The first couple of the year, really right up until this year, there weren't many conversions at all. It was, we weren't selling new licenses and I think maintenance was declining 5%, 6-ish kind of percent. We just have a normal industry kind of attrition rates there. This year, we're actually starting to see customers do some conversions, which we'd like that's been more recent. And I think that's picking up now. I think there are a couple of things driving that. One is I think is a growing acceptance of SaaS-based solutions, and the second is companies that had already invested and on-premise, they weren't as quick to make the change because they have sort of sunk cost, but as the investment ages and they start looking, "Gee, I need to do an upgrade. Should I do an upgrade? Should I do a conversion?" The economics of a conversion for -- are quite attractive to companies. So we're starting to see that pick up, and yes, we're hopeful that trend continues. And that's fueling some of the growth we see in subscription revenue and in the Network revenue. Every time we do a conversion, we generally swap out a little bit of maintenance revenue for what ultimately becomes a lot more software and Network revenue in the future. So it's a win-win for us and the customer. They see lower to TCO and we ultimately extract great revenues from that customer.

Operator

Our next question comes from the line of Lauren Choi from JP Morgan.

Lauren Choi

Just wanted to ask, you mentioned that some markets where stronger and given similar other companies have seen weakness in Europe, can you just go around the geographies and maybe give us some color on where you're seeing more strength than other places, and whether it's software or network volumes that you're seeing strengthened?

Bob Calderoni

Yes, so I think we're seeing more -- we're seeing growth in all of the markets. If I were to rank them, I would say we're seeing sort of like the macro headlines that you read. There's greater strength in some of the emerging markets than there are in the developed markets. Within the developed markets, the U.S. is growing more than in Europe. This was actually a pretty strong quarter in the U.S., Europe was up but not as much as the U.S. So I'd say emerging market, U.S. and Europe, with all 3 them positive in contributing. And I think that's true. From a booking's point of view, it's also true when we look at network trends as well.

Lauren Choi

Okay, great. Another one is just around I guess, pricing again. I think in the last quarter or so, you guys mentioned that driver of kind of organic growth of the network wasn't really pricing, but more of volumes, is there any way to quantify that at this point? And any update in terms of is that's still the case and like 30% of that 58% network growth is volumes versus the rest is -- kind of I just want to get a sense of how big the driver on around volumes is coming from?

Bob Calderoni

It's hard to get specific on that, but the organic growth projection for the year is 58%, it's a little over 60% right now but I think to be at 58% to 60%, I think is what Ahmed said earlier. In there -- contributing to that is a combination of -- there's really 3 things. We see really good growth in volumes and the volume's trailing 12 months were up 23%. We see growth in a number of relationships, supplier relationships. In fact, this quarter, part of the strengths we saw this quarter was the fact that we've had our highest single quarter in terms of bringing on new suppliers, transacting suppliers. So that's adding to it. And then obviously the business model change, has had an impact, but breaking that out is -- I don't want to suggest 58% is a steady state. Our goal -- our long-term model has always been were 20% to 30% range in the network. We were encouraged during the recession that it was, even during a recession, we were inside that range. Most years, we've been above that range. And sitting here today, we're not updating that, per se, but I don't see any reasons to think that we can't be near the high end of that range or higher for the foreseeable future.

Lauren Choi

Okay. And just last question, your quota-carrying reps, is there a target number that you're like looking to reach and obviously I think you added I think 4 or 5 new quota-carrying reps, is that going to continue through 2012?

Bob Calderoni

Yes, I think we're going to increase -- it's not going to increase at the rate we had been earlier this year. I think when Kevin and I talked about, we digest what we've done. And sometimes you bring on too many, too fast, you don't have enough capacity around them to make them effective, so I think we've got to digest what we've done for a quarter or 2 here and just slowdown the rate growth and really start to build some of the capacity in all the parts of the business. Quite honestly the sales capacity has exceeded our deployment capacity, which is a good program we have. So we're going to put a little more capacity on deployment right now so we get them to advance.

Lauren Choi

And as a follow-up to that then, you've definitely invested all your upside into growing the top line. If you, let's say, in the future like you said kind of slowed down your quota-carrying reps, is the plan still to invest the rest into the top line or can we see a day were we could see some upside on earnings?

Bob Calderoni

There's definitely a day where you get to see some upside in earnings, but right now, I would say the investments -- we did a business case evaluation of the investments I think we'd all be pretty happy with it. We took the organic growth rate of the company from the mid-teens to high 20s by making those investments, and these are all high gross margin annuities that we're selling. So I think making investments right now appears to be the right thing to do to continue. And we might just shift some of the investment from sales capacity to deployment capacity because at the end of the day, we generate revenue not only from selling software but from getting it deployed so we can get more network revenue faster. So we might tweak where we put it in the company. But all of it should contribute to pretty solid subscription revenue growth for the foreseeable future. Getting the operating leverage out of this business is going to be a very, very easy thing to do because you see the gross margins of the business. When we talk about network margins, it's even higher than the company gross margins. So just throttling back on investments one year will be an easy way of getting margins up. I just don’t think now is the time to do that, while we have a lot of growth opportunity right in front of us.

Ahmed Rubaie

So just to add to that, Lauren, to wrap up your question. So Bob's 100% right in terms of the ROI on our organic investments. Just keep in mind, we've done pretty well also in ROI on our acquisition. Quadrem has been a terrific acquisition for us financially, as well as from a customer perspective. I think for now, again we're still in the planning process. We're not ready to talk about fiscal year '12, so stay tuned on that front.

Operator

Our next question comes from the land of Jeffrey Rhee from Craig-Hallum.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

A couple of questions. First just on Quadrem. When you bought it, you had a comment that you're going to take your time integrating because you really felt they had best practice. As you wanted to incorporate not only ASPs, per supplier we're fairly dramatic in terms of the differences. Thus far, what have you learned, what can you incorporate?

Bob Calderoni

Well, we've learned they're pretty good at getting adoptions with their customers faster than Ariba does. Part of that is just the DNA of Ariba, it's DNA which is a software company. It was all about selling software applications. Getting the application up and running. Quadrem really didn't have software applications to sell. They had a network to sell. So they were better at getting inside the company and mining for spend that they could drive onto the network. So that's something, that's been a good learning. And as part of the integration work we're doing today, really is to export those management systems, if you will, into the core part of the Ariba business. The reason why there is pricing gaps geography-to-geography, in the Southern Hemisphere Quadrem is sometimes doing more than just running POs and invoices through the system. Sometimes there's some complementary services and that's why they have higher prices than some of the markets, but once you strip that out, the pricing is not that far apart.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

And along those lines and I guess as you look at the guidance, which looks just solid, across the board, but if you look at this incremental 7 on the network side, and as we look at the core versus Quadrem, is the bulk of that coming on one side of the other, both of the incremental?

Ahmed Rubaie

It's pretty evenly split, Jeff, half and half.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

Okay. And then I guess just lastly, you've touched a bit on the current trends in the quarter in terms of geographies. I'm wondering if you just -- can you explain to me a little bit more, in terms of the pipeline, what jumps out there? Are there a vertical markets that are showing strength, the geographies, anything notably different around what appears to be accelerating or lengthening cycles, anything that's building there?

Bob Calderoni

No. Pipeline, it's very strong. In fact, the growth of the pipeline in terms of dollars has been accelerating as we've been bringing on some more of that non-quota carrying sales capacity I talked about, the demand generation team that's within our marketing organization. That's really kicked in the gear last 2 quarters. So we're seeing a good growth again. That's in all of our markets, that's showing up as well. And if you look at it from types of customers, pretty similar, good mix, small, medium, large companies and then a pretty good mix across all the industry verticals that were historically strong and from financial services to retail to pharmaceutical, healthcare and services. So it's really just a good inflation on all aspects of that. So we're very encouraged. It's a broad-based strength in the business, by product, by customer, by segment, by market right now, and just real good overall momentum.

Jeffrey Rhee - Craig-Hallum Capital Group LLC

I guess just lastly, I mean obviously a lot is going right, what are you worried about in terms of execution, what is your biggest execution risk or challenge at this point?

John Duncan

Yes, as I said earlier, we got the sales engine going in the company and now we sometimes get out of balance sometimes. You get too much -- it's a good problem to have when you have too many customers but we got to get the other the parts of the organization to move at the same speed or else we're going to fall behind. And we don't want to do that. So we've got some execution capacity we got to build inside the organization and get it to balance. And that keeps me focused. And I'd say, right now, we have a lot of confidence in our business. We feel like Ariba's got the wind and the sail, we got good momentum and it's more I guess, if there's risks out in the world out there, they appear to be macro risks more than a business risks. And yes, we do pretty well in our down macro environment. I don't necessarily see anything impacting our business. But there seem to be more of macro issues in the world than Ariba issues right now.

Operator

Our next question comes from the line of Brad Sills from Barclays Capital.

Bradley Sills - Barclays Capital

Just on the new customers, obviously, very strong number this quarter. Can you comment a little bit on verticals, specifically where you saw more traction on new wins?

Bob Calderoni

Yes, so I'd say we had -- it's good business on all the verticals and one that was stronger than average were in services. Companies like DirecTV, American Red Cross, I mentioned in my prepared comments, in addition to a number of others that we can't mention by name. Retail and consumer products was strong, financial services remained strong. I would say sort of average growth for this quarter were in the other sectors like high-tech, healthcare and manufacturing. They were average ,in services, retail, and financial services were above average. But good business on all of the segments.

Bradley Sills - Barclays Capital

Great, are you seeing any change in kind of the mix with these new customers with direct versus indirect spend? Are you see more of these new customers relying on the network for supply-chain spend versus indirect, Or is that kind of mix then kind of stable with historical?

Bob Calderoni

It's a pretty good mix here. Some customers are coming to us and they've got compliance issues so that tends to be -- it's going to be initial indirect focus. Some customers are coming to us for e-invoicing and automation and that's going to touch a lot on the supply-chain spend. And a number of customers probably, the fastest-growing areas is service spend. That's a category of spend that is very complex. It requires a lot of collaboration with suppliers. And that's where the network really plays a big important role. So services spend is a source of some of our projects. Now all of it -- the interesting thing is all of our projects whether the initial phase is geared for indirect of services or supply chain spend, it easily expands, and that’s part of our adoption focus, no matter why you started with us, we want to go deeper and wider in your organization and go after all spend. So we'll get started anywhere and then try and grow to the right and left in the organization.

Bradley Sills - Barclays Capital

Got it. And to that end, any particular solution that you're seeing more momentum in cross sell, up sell, whether it's sourcing, contracts management, spend, et cetera?

Bob Calderoni

It's interesting, again, it really is a customer's specific. If you were to draw the business problem out on the chart in Chevron from beginning to end, you'd say every customer starts with spend analytics then they would go to sourcing and they'd go to contracts and then procurement and then invoice automation. And that would be a very logical and sensible flow. The reality is every customer has different pain points and they start all over the maps. Some will start with the invoicing, some will start with analytics, and some will start with procurement. It really has to do with different people are responsible for different things. It really is who has the initiative in the organization to do that. And it's a pretty good mix of all of that every quarter. We don't see any noticeable trends or changes.

Bradley Sills - Barclays Capital

Great and just one last one on Discovery, you mentioned that you're exploring different pricing. Is it price points, is it adding more services, more premium to higher end pricing, I guess, how would you describe just reception in general, and then some other things, maybe more specific whether or you're doing to extent you can speak to that?

Bob Calderoni

I missed the beginning of the question, can you just say that again, I missed the first part.

Bradley Sills - Barclays Capital

Just in general reception of Discovery, you mentioned it's been good. Maybe if you can just describe a little bit more on what you're seeing there in terms of uptake within the supplier base and then you mentioned tweaking the pricing model, maybe just a little more color on some of the things you're doing there?

Bob Calderoni

So Discovery is going very well. The number of suppliers is growing rapidly. I think we topped 596,000 suppliers on Discovery. We're seeing more activity, activity measured by postings. Whether they are full, open postings or are they eIntros, those numbers are up significantly in terms of both the quantity of them, as well as the dollars that they represent. That's out there and has been pretty steady progress on that front. The types of things that customers are doing on Discovery is growing as well, whether they are spot buys or walk-up type of people that don't even have any Ariba software, just walk up to Discovery and put us a very light sourcing project out there, all of that's working. So we're seeing a good traction. We think we need to continue to work on some marketing efforts to build awareness of this with both buyers and suppliers. And that's part of our efforts right now and we're tweaking the pricing. To me, it was more important. We didn’t do the pricing that tried to generated any revenue right now. So if it gets too soon to try and get any meaningful revenue out of this, we got to build more awareness. I wanted to actually set a precedent that there is pricing for this so that when we go step on the monetization pedal in the future, it's not a shock to the system. So we're using this time right now to trial out different ways. Right now, we have a model that says you pay, buy the drink for -- through a supplier. And you want to respond, you paid by the drink mostly whether it's a full posting or the eIntro. We want to see if there is more creative ways of perhaps packaging that into various different subscription sizes and we'll sample just to get some good, market feedback, and elasticity feedback, and I think that will position us well so that when our marketing activities kick in, we feel like we have enough awareness around Discovery, we'll know exactly what's the best way is to monetize it.

Operator

Our next question comes from the line of Richard Williams from Cross Research.

Richard Williams - Cross Research LLC

Can you talk a bit about the maintenance and growth rates there because I know I notice there was a little bit of a slower growth trajectory than in the past?

Bob Calderoni

Ahmed, I guess I can take that. In the past when we wanted to build any conversions, it was trending about minus 5%, minus 6% for the past several years. We're going to see a little bit more of a decline, I guess, is the best way to say it in that line item because in addition to the historical attrition that one would have in that business, we're now starting to see proactive conversions. So that's a good thing because every time we convert a customer, we generally get more subscription revenue out of that customer than we were getting maintenance revenue. So we're starting to see that today, we're going to see, I think part of that is some of the strength in the subscription business and part of that is, I think, the reason for a little bit less maintenance revenue is on that forecasted in the upcoming quarters.

Ahmed Rubaie

The other upside as we've talked about in the past, Richard, is particularly when you're converting onto the network volume is you get the flywheel moving at the same time. So not only you -- dollar-for-dollar, you're moving from the maintenance revenue stream with some software. Overtime you'll kick the flywheel into motion and get more of their suppliers, and that generates more revenue. So it's a win-win, as Bob said earlier.

John Duncan

Yes, I think we've run out of time. So, Bob, do you want to wrap things up?

Bob Calderoni

Okay, John. Well, obviously we're very, very pleased with the performance this quarter and for the past several quarters. Lots of momentum in the business. Strength across the board based on the forecast Ahmed has provided for the upcoming quarter, we are seeing more of that, here in front of us, and so we're very encouraged by the business. And just a reminder to everybody, we've got Analyst Day coming up here early September in Boston. And we look forward to seeing all of you there and talk about some of our initiatives that we have inside of the company to keep this type of momentum going for quite some time. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.

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