THE FRONT OFFICE GORILLA GAME: Q3 2000
Before I begin the report, I want to thank John DelVechhio for his thorough Fool report on Siebel's third quarter and to Brian Crawford for providing detailed information about Siebel's Q3 results. Their info was especially helpful because this is the first report on the Game I've written without access to Siebel's conference call. And a "thank you" also goes to Kayaker (SI screen name) for finding an old press release I was unable to locate.
News
Since the most recent Game report:
Siebel expanded its relationship with Nokia by signing an agreement to develop e-business applications for mobile devices to be used with Nokia's WAP Server.
The company also expanded its relationship with IBM to include a joint marketing program in the mid-market sector.
IBM has about 90,000 business partners. The agreement allows Siebel and IBM to focus on them not just for their internal use but also to make it possible for them to market the product for their smaller customers.
In a surprise move (at least to me), Siebel Systems announced on the day of the earnings report that it had acquired Sales.com, a company it spun off just 11 months ago. At that time, Thomas Siebel was quoted in the press release: "Operating as an independent, well capitalized company with a singular focus, Sales.com is poised to dominate the market for online sales professionals and become of the great Internet software and service companies."
My questions: Considering that Siebel Systems became a non-controlling stockholder of Sales.com, who wanted to sell the company back to Siebel Systems? And why?
The best argument I've seen is that Sales.com operating independently couldn't successfully develop more robust products because doing so interfered with the natural and desired migration to Siebel's more advanced products. By rolling Sales.com back into the fold, that problem is eliminated. Ahem. :) I find it very difficult to believe that management wasn't aware of that issue 11 months ago.
I could be very wrong, but I've never believed that Sales.com can play a serious role in the adoption of Siebel's product. The vascillation about a strategy involving Sales.com is evidence for me that management is very unsure about how to best deploy those assets.
Siebel Systems's Q3 Report
If the results of this quarterly report aren't as near-perfect as any report can be for a company of its size, I can't imagine what would be needed to make it so. Remembering that nothing is more important to Gorilla Gaming than monitoring product adoption, the quarterly rate of year-over-year growth in revenue has been increasing for more than a year. Licensing increased 135% compared to the same quarter last year. It increased 24% sequentially, certainly a rarity for a company with about a $2 billion run rate. (One report I saw stated that no software company has ever had accelerated growth rates at this level, so it's not a surprise that analysts are not forecasting such continued growth in the future.) And though the industry and Siebel has been consistently experiencing faster growth in services and maintenance revenue than in licensing revenue, the company reversed that trend at least temporarily by enjoying greater growth in the higher margin licensing revenue.
Speaking of licensing, more than half of it continues to come from existing customers. Though 85% growth (year-over-year) in U. S. customers is nothing to sneeze at, international licensing increased 274%. The European sector of the international group increased a whopping 360%. Can you spell t-o-r-n-a-d-o? :) It's especially interesting that the European customers tend to initially adopt the product with great enthusiasm, ensuring multi-channel management and buying multiple software modules.
The company continues to aggressively expand its market share. According to the company, Siebel now owns 75% of the sales force automation (SFA) market. Other segments are as follows:
Marketing: 34%
Field Service: 48%
Call Center: 50% or 60%, depending on the report I read
Partner Relationship Management: 51%
Internet Self-Service: 28%
Product Configuration: 28%.
Perhaps most important is that those market shares have grown significantly in the last three quarters. With the exception of the SFA market which was already huge, most of the other categories increased anywhere from 50% to 100%. This growth in market share is Gorillahood in action and is one heck of a lot of fun to watch.
Siebel Systems is a terrific case study of how a company with a product in the tornado benefits from a effective bowling alley strategies. Siebel's primary bowling pin was its sales force automation (SFA) product. Beyond that, the company focused initially on financial services customers, telcos, and high-tech customers. Though those customers continue to be the primary source of Siebel's revenue, there are 11 vertical markets for which the software apps are tailored to address.
Though management is clearly focusing on sales growth and acquisitions, capital management is not being forgotten. (Bruce loves this because he likes to focus on the improving Flow Ratio and all its implications.) Days sales outstanding (DSO) reduced for the second quarter in a row to 66. Bear in mind that management expects it to level off at 70 to 80. So when (if) DSO increases and when (if) the market tanks the stock because of it, you will only be consoled by remembering that this is part of management's business plan though that fact will likely be remembered by very few.
In the last Front Office Game report, I identified the second tornado in the space -- the mid-tier market -- and I also proclaimed Siebel as its Gorilla. Hey! I thought that was pretty big news! I was really surprised to see that there was no particular response in the thread.
We now have three sequential quarters with which we can compare Siebel's product adoption in the mid-tier market:
Q1 -- $24 million
Q2 -- $60 million
Q3 -- $130 million
For those who thought that a 150% sequential increase in Q2's mid-tier revenue was no big deal because it was on a base of only $24 million, consider that on a base of $60 million it was followed by a sequential increase of 117%. And for greater perspective, consider Fool Mike Trigg's report that leading mid-tier competitors Onyx and Pivotal had revenue of only $33 million and $21 million, respectively, in their most recent quarter. Though both companies are working off substantially smaller bases than Siebel, both are also growing substantially slower because they are losing marketshare to Siebel.
Siebel's mid-tier market is being powered primarily by three forces:
1) Siebel's telesales team of 220 people (and growing);
2) Siebel's partners, especially Compaq which is reselling product under an OEM agreement; and
3) Sales.com (apparently despite my personal lack of enthusiasm noted above)
What lies ahead?
It's not reasonable to imagine that the growth can continue to accelerate forever. It will be interesting to see when the rate of growth indeed begins to slow and -- beware -- what the market's reaction will be when it finally happens. No big deal for Gorilla Gamers. As I explained just tonight in the Siebel folder, GGamers exit a company only upon proven threat of a discontinuous innovation.
On the other hand, mtnlady will be the first to remind us of the growth opportunities in the government sector. (Is there any organization with more customers than the U. S. Social Security Administration, a user of Siebel's product?) She will also remind us that it's not inappropriate to look at e-business as an upcoming tornado, though both of us will have a terrifically difficult time defining it.
Customers will soon see a preview of next year's product, Siebel's 7th major release called Siebel 2001. It will run entirely on Netscape or Microsoft browers, the important thing being that it will be a zero-install product. (To fully appreciate that, look up "Zero install client" in the manual's index.) Wireless apps will be fully integrated. There will be a new suite of apps enabling interactive selling. The recent acquisition of Janna Systems will make it possible to integrate auction software. The e-mail channel will be enhanced by knowledge-based automated response. And the suite will include a portal for employees making it possible to improve internal communications at lower cost.
The Front Office Software Game
It's very unusual that all three indices in the year-to-dagte column are in the negative category, especially so late in the year. This is the first time in quite awhile that investors have been operating in a fundamentally negative market. Yet having doubled its value (so far) this year, our Front Office Gorilla Game continues on its recent trend of stomping the market as the following numbers show. All values are as of the close of market on 11/10/00.
Year-to- History
History Date Annualized
Gorilla Game 732.79% 103.84% 251.11%
Nasdaq 67.81% -25.57% 35.90%
S&P 500 23.01% -7.03% 13.06%
Russell 2000 3.87% -4.73% 2.27%
If you doubt the power of compounding, stop right now and digest those numbers.
(Pause)
Despite the 25% year-to-date loss in the Naz, it has risen 36% annually since Memorial Day weekend in 1998 when I began playing this Game. Though 2 1/2 years is far short of being a long-term period, I believe investors who are saddened by this year's downturn of the market and the decline in the value of their portfolio should take a longer view. Gorilla Gaming being a long-term proposition, investors should fully appreciate and relish the longer-term, well-above-average upturn in the market evidenced by the far lower values two, three, five and ten years earlier.
Now, the numbers for the Siebel Systems:
Change
5/25/98 5/1/99 4/11/00 Current From First
Buy Price Buy Price Buy Price Price Purchase
SEBL $11.50 $19.22 $104.94 $96.64 742.96%
The final tally:
Siebel Stock: $83,174.52
Cash: 104.08
Total Value: $83,278.60
Details:
The Front Office Gorilla Game (not a real-money portfolio) was begun with $10,000 and four stocks in equal dollar amounts on May 25, 1998. Using the rules of the Game, I gradually eliminated all gorilla candidates until only the stock of the Gorilla (Siebel) remained as it does today.
Commissions are based on $8 per trade. The value of earnings on invested cash is not calculated; those earnings would have been so insignificant that no meaningful lesson could have been learned from them.
CAVEAT: I own shares of Siebel Systems. In the past I have owned long and short positions of Siebel's competitors (including some that were at one time "in the Game") and reserve the right to do so in the future. Most important, please, please don't make any investment decisions based on anything coming from my keyboard. Do your own homework!
--Mike Buckley |
