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Shares of Ariba (NASDAQ:ARBA) rose 11% on Friday after posting strong second quarter results.

Second Quarter Results

Ariba, the business commerce network provider, reported a 21% revenue increase to $131.5 million. Subscription and maintenance revenues increased 23% to $102.1 million, while service revenues increased 13% to $29.4 million.

The company reported an operating profit of $4.2 million compared to a $1.1 million loss last year. Excluding amortization of intangible assets and stock-based compensation, operating income rose 48% to $27.0 million. Income from continuing operations came in at $1.8 million or $0.02, while non-GAAP net income came in at $24.6 million, or $0.25 per share. Earnings per share of $0.25 beat analyst consensus of $0.22

"As evidenced by our strong quarterly results, Ariba continues to perform at a high level," according to CEO Calderoni. "We are executing our strategy, bringing to market new innovations and strategic partnerships that will make it even easier for buyers and sellers to connect and collaborate more efficiently".

Valuation

Ariba ended its second quarter with $225 million in cash, equivalents and short term investments. The company operates with merely $7 million long term liabilities for a net cash position of $218 million. After Friday's rally shares are valued at $3.9 billion which values the operating assets at $3.7 billion. This values the firm at 8.3 times annual revenues and 111 times 2011's annual earnings. The revenue multiple compares to multiples of 4.1 times for Oracle (NYSE:ORCL), 2.2 times for IBM (NYSE:IBM) and 4.3 times for SAP AG (NYSE:SAP).

Investment Thesis

Shares in Ariba have seen a strong performance in recent years moving from lows of $7 in 2009 to highs of $40 at the moment. Although the company has seen some strong revenue growth in recent years (the company is on track to report 2012 revenues surpassing $500 million), profitability has been subdued and inflated by one time gains from discontinued operations. GAAP net profits remains close to zero.

Shares trade at a significant premium on revenue multiples compared to some of its major competitors while Ariba is structurally less profitable. I don't see the major value drivers which the market sees and might consider a short position.

Source: Ariba: Earnings Beat Propels Shares To New Highs