THE FRONT OFFICE GORILLA GAME: Q3, 2001
The News
Siebel 7, the newest version of Siebel's line of applications software, will ship in Q4. It is fully web-based with 60 new modules and 7 new verticals. (I seem to remember that there would be 8 new verticals but I could be wrong.) Worldwide training of Siebel employees on the new product line has been completed.
More than 200,000 companies use IBM eServer iSeries designed for small- and medium-size business to run mission-critical applications. Siebel's eBusiness Applications can now run on IBM's platform.
Cap Gemini Ernst & Young, an integrator, increased its commitment to its partnership with Siebel. With 300 of its 1000 Siebel consultants currently Siebel-certified, Cap Gemini has agreed to certify all of them.
Siebel announced an agreement to acquire nQuire Software, a maker of business analytics software. The technology will be incorpporated in Siebel 7.
Clarify, one of the four original players in my Front Office Gorilla Game, was bought by Nortel in October 1999 for more than $2 billion. Nortel announced the sale of Clarify-related patents, intellectual property and trademarks for $200 million to Amdocs, a St. Louis-based information management company I'm not familiar with. The deal is expected to close in Q4.
Many of Siebel's modules are now voice-enabled, allowing information to be obtained using standard spoken commands over landline and wireless telephones.
Cisco and Siebel are now delivering solutions that integrate Siebel's call center software with components of Cisco's customer contact software platform.
Marketshare and other numbers
Management estimates the following licensing marketshare numbers as a percentage of the top five competitors (not the total market):
Q1 Q2 Q3
Salesforce Automation: 76% 80% 68%
Call Center Software: 72% 72% 70%
Marketing Automation: 41% 44% 46%
Field Service: 61% 57% 56%
Interactive Selling: 55% 58% 55%
Channel Management: 65% 73% 76%
Mid-market CRM: 55% 55% 65%
Internet Self-service: 67%
DSO increased to 87 days, slightly beyond the target of 75 - 85 days.
Total Revenue: down 14% year-over-year
Licensing Revenue: down 37% year-over-year
Service Revenue: up 25% year-over-year
EPS: down 48% year-over-year
Contrasting Q2's international licensing revenue which was way up both sequentially and year-over-year, it was off in Q3. Tom Siebel said IT spending is way off all over the world, that it's not limited to any geographical areas.
Domestic Licensing: 58% of total licensing, up from 44% in Q2
International Licensing: 42% of total licensing, down from 56% in Q1.
We've seen articles in the press saying that the days of CRM transactions exceeding $1 million are over. In Q2, Siebel had two transactions in excess of $20 million and 64 in excess of $1 million. Though there were no really huge transactions in Q3, the salesforce closed 44 deals exceeding $1 milion and 10 deals exceeding $5 million. The company is tracking 23 prospective deals in excess of $5 million, 55 deals in the $2 - $5 million range, and 142 deals in the $1 - $2 million range.
New customers contributed 72% of licensing revenue, much larger than normal. Tom Siebel was surprised that the events of Sept. 11 and the current economic malaise affected existing customers' projects much more than new customers' projects. Intuitively, he thought it would be the other way around.
The average selling price was down slightly, nothing significant. Discounts were also decreased.
The really big change in Siebel's financials was that the operating margin for Q3 was sliced nearly in half to about 11%. Though expenses decreased by $55 million, revenues simply fell too far too fast. Manageament is confident that the company will "immediately" achieve its continued target of 20% and that it won't be necessary to cut head count more than normal. I conclude from this that management expects a substantial sequential increase in revenue in Q4, typically the best quarter for everyone in the industry.
Even if FY02 revenue comes in on the very low end of analysts' estimates, management says the 20% operating margin will be maintained. Assuming there is no reason to think the 37% tax rate will dramatically change, management is effectively projecting minimal net margins of about 12% to 13% next year.
That leads to a theme that was repeated throughout the conference call -- that management feels the company is poised to fully exploit the opportunities that will arise once the economy turns around. They aren't planning any unusual head-count decreases because they want the personnel to be available when the economy turns.
Notice also that R&D expenditures increased 36% year-over year despite the 14% decline in revenue. That was the only area of the company in which head count increased. Management is taking a long-term view, ensuring through good and bad times that quality product is in the pipeline, another recurring theme of the conference call. The company's $1.5 billion in cash that increased by $57 million in Q3 makes that easily affordable.
The third recurring theme -- and probably the most important -- is that the management team is focused on ensuring profitability and positive cash flow even during these more difficult times.
Competition from the ERP players
In the earliest days of the CRM industry, I remember endless debates and articles about whether or not the ERP players, using their strategy of offering integrated CRM product, would be able to catch up with the specialists such as Siebel. There have been numerous recent articles singing the same song that the ERP players are narrowing the gap.
The theme is that the CRM specialists' customers have to overcome the problem of integrating CRM with the back office. The ERP players' position is that their own CRM products are much more easily integrated with their own back office products. Tom Siebel reminds us of the example of Marriott, a long-time Siebel customer, that has 73 apps integrated with its back office. He feels the notion of integration trivializes the real situation, commenting that "once it gets beyond the industry analysts, it doesn't seem to be getting its recognition in the market." Siebel's market share seems to at least somewhat support his thinking, biased as it is. He says the ERP players "continue to not get any traction in the marketplace."
A related theme is that the ERP players are selling a horizontal approach. 76% of Siebel's revenue comes from their vertical portals. Tom Siebel says the customer is interested in verticals tailor-made to address industry needs, not horizontals that try to address all industries' needs in the same way.
Speaking of verticals, Tom Siebel expects the public sector to be the largest vertical market within a few years. Recent attempts to ensure capitalizing on the eGovernmnet opportunities include a dedicated eGovernmnet domestic sales manager and board members for Siebel Europe with strong government contacts in the UK, France and Germany.
ERM
There will be a dedicated ERM sales force in FY2002.
In Q3, there were 65 new ERM customers, bringing the total to over 100. Of the company's top 20 transactions in Q3, nine of them included ERM product, an indication that the company is leveraging its CRM strength in the ERM arena. Three large referencable customers, Compaq, Fleet, and TNT Bank, have already gone online or will soon go online with ERM product.
Despite the good news, ERM revenue was still small enough that management didn't itemize it.
THE GORILLA GAME
There has been so much discussion in the folder recently about how effective Gorilla Gaming is or isn't that I can't add much here that won't be repetitive. I'll only make two points:
1) Despite that Siebel's stock price decreased from its all-time high of about 85% in less than a year, it has tripled in value since the Game began 3 1/2 years ago.
2) During the time the Game has been played, the Naz and the S&P 500 have lost value. The Game is up nearly 50%.
As of the close of market, October 19, 2001:
Since Since History
History 1/1/01 1/1/00 Annualized
Gorilla Game 47.84% -74.56% -63.81% 12.17%
Nasdaq -7.41% -32.35% -58.93% -2.23%
S&P 500 -3.33% -18.68% -26.94% -0.99%
The numbers for Siebel Systems as of the close of market, October 19, 2001:
Change
5/25/98 5/1/99 4/11/00 Current From First
Buy Price Buy Price Buy Price Price Purchase
SEBL $5.75 $9.61 $52.47 $17.11 197.57%
THE FINAL TALLY
Stocks $14,680.38
Cash 104.08
Total $14,784.46
Details about the Game
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.
And last, the most important stuff ...
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 |
