Ever watch an analyst commit career suicide? Ben Rose has been more wildly wrong on software stocks than any analyst out there, but does he have to bring it up two weeks before earnings?
Adams, Harkness & Hill Research Note
Stock:SEBL Subject:SELL the Stock Analyst:Ben Z. Rose
Price:$64 1/2 Rating:Sell
Fiscal Yr.
De99 $0.83
De00 $1.05
CY 99:$0.83 JuQ2:$0.20vs$0.11
CY 00:$1.05
Siebel Systems
(Hook, Case, Close)
Hook:
We are reducing our rating on Siebel Systems from Market Performer to Sell
because of
ú increased competitive pressure in the SFA market,
ú a shifting business model that features lower margin services,
ú the threat posed by the Web,
ú the uncertainty presented by a new management team, and
ú our concern that "cash-less" net income will harm the lofty valuation, which
today stands at 60 times our 2000 estimate.
Accordingly we recommend sale of the shares.
Case:
1. Core Business under Siege. Lower priced alternatives such as SalesLogix offer
roughly 80% of the functionality at 25% of the price. The forthcoming Siebel
for Workgroups product line could cannibalize high-end Siebel 99 sales.
2. Shifting Business Model. Over the last several quarters, services has
increased as a percentage of sales. Services carry much lower gross margins than
licenses.
3. Impact of the Internet. The Internet will challenge all vendors of packaged
client server applications, as they shift from focusing on individual worker
productivity to finding better ways to leverage customers and suppliers over the
Web. As the CRM market moves from front office automation to customer
automation, we believe self service and self-sales will become increasingly
important. We believe Siebel will have to make a significant number of
acquisitions to maintain its market-leading share.
4. New Management Team. Virtually every customer-facing functional head has been
with Siebel Systems fewer than 90 days, including the president, head of North
American operations, head of international operations, and head of worldwide
services and support. While industry veterans from large, well-respected
companies such as SAP and IBM now occupy these top posts, the fact that the
Company had to look outside to fill so many high-level positions leads us to
believe it has been operating without much management depth.
5. Quality of Earnings. Over the last two quarters, Siebel Systems has recorded
$40 million in net income, yet has generated virtually no cash. A rise in DSO to
99 days in the March '99 quarter tells only part of the story. The September 30
'98 10-Q revealed that more than 10% of revenues were derived from "related
parties," which seem to be defined as firms that are Siebel Systems suppliers as
well as customers. This raises the specter of barter transactions, a
particularly worrisome sign, as customer concentration has been rising: In 1998,
the top 10 customers accounted for 22% of sales. In the first quarter of 1999,
the top 10 accounted for 34%. |
