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THE FRONT OFFICE GORILLA GAME: Q4, 2001
The News
The big news of the quarter is the delivery of Siebel 7, the latest version of Siebel's software. Tom Siebel says it's the highest quality, most scalable product the company has ever shipped. Built using a web-based architecture with a zero-footprint client, it is made up of 200 products available in 20 languages. It has 2400 screen displays, up from 1400 in the previous version. There are 20 industry-specific applications of which seven are new. (Siebel derives nearly 80% of its licensing revenue from vertical apps.) Those who believe Tom Siebel will note his opinion that the product is expected to set the standard in enterprise CRM for the next two years. Setting a standard is not unimportant for Gorilla Gamers.
British Telecom announced in November that it is partnering with Siebel to deliver CRM to small- and mid-size companies in the United Kingdom.
In keeping with Rule #10 (most news has nothing to do with the gorilla game), there is no other "news."
Conference Call Overview
Management stressed that the four primary objectives for the quarter and the year were accomplished:
-- Running a cash-flow positive business
-- Maintaining customer satisfaction levels
-- Maintaining market share in all markets
-- Maintaining product leadership
Beginning in November, management saw a return to more normal, rational business processes. The current buying behavior appears to be unlike the frenetic purchasing of product in 1999 and 2000 yet more robust than the all-stop environment brought on by September 11. Half of Siebel's revenue for the quarter was booked in December and nearly half was booked in November.
Tom Siebel described 2001 as "a challenging year for all of us. I think we rose to the challenge." Coming out of Q4 of the previous year, management didn't see the recession and instead planned on "very, very rapid growth." In the middle of February, it became evident that the economic environment had changed. Responding to that, company, departmental, and individual objectives were changed. On April 1 the company had a new plan in place.
Then Q2 got worse.
And Q3 was worse yet.
During all of that, management's overall goal (corroborated in previous conference calls) was to position the company so that it could capitalize on its strengths and its competitors weaknesses once the economy turned around, all the while accomplishing the objectives shown above.
Q4 Revenue
Total Revenue: down 17% year over year; up 12% from Q3
Licensing Revenue: down 31% year over year; up 29% from Q3
Service Revenue: up 7% year over year; down 2% from Q3
EPS: no year-over-year change using pro forma comparisons (which is the comparison management wanted us to make this time last year); up 86% from Q3
2001 Revenue
Total Revenue: up 14%
Licensing Revenue: down 4%
Service Revenue: up 44%
Marketshare and other numbers
Siebel has increased market share in every product category in the last year based on management estimates. The following licensing marketshare numbers are a percentage of the top five competitors (not the total market):
'00 '01 '01 '01 '01
Q4 Q1 Q2 Q3 Q4
Salesforce Automation: 75% 76% 80% 68%* 80%
Call Center Software: 60% 72% 72% 70% 72%
Marketing Automation: 34% 41% 44% 46% 60%
Field Service: 48% 61% 57% 56% 58%
Interactive Selling: 48% 55% 58% 55% 58%
Channel Management:** 61% 65% 73% 76% 76%
Mid-market CRM: 55% 55% 55% 65% 67%
Internet Self-service: 29% ? ? 67% 60%
* Considering that sales force automation has always been Siebel's strength, that stat showing dramatic decrease in market share was a big surprise. Now that the Q4 stat is once again in line with previous stats, I assume the number given for Q3 was a mistake.
** In previous quarters management has referred to "channel management" and this quarter they referred to "partner management." I'm assuming they are the same, though I tend to think of them as being very different. Reader beware that both Q4 numbers are strictly my interpretation that management is referring to partner and channel management interchangeably.
DSO decreased to 72 days from 87 days in Q3 and 81 days in the year-earlier quarter. Management continues to maintain a target of 75 - 85 days.
Domestic Licensing: 56% of total licensing, down from 58% in Q3
International Licensing: 44% of total licensing, up from 42% in Q3.
Product Mix
Regarding verticals, the financial services, pharmaceutical and life sciences sectors were very strong in Q4. The pharmaceutical sector was 14% of licensing revenue and it grew 132% year-over-year. The telecom sector was 28% of licensing for the entire year, the third consecutive year it increased. The other sectors were about the same as Q3.
Regarding the function of software Siebel sells, sales force automation software provides about 25% of all licensing revenue. Field services and call center software combined contribute about 50% of the licensing revenue. Though the company built its earliest reputation on its sales force automation software, it's interesting to observe that the Gorilla of CRM has leveraged its SFA dominance so well that SFA is no longer the dominant or even the largest segment.
Thanks to the acquisition of nQuire and its analytics technology, Siebel closed $15 million in its first quarter of selling analytics software.
New vs. Existing Customers
Licensing revenue from new customers was 54%, a return to the norm. In Q3, new customers contributed a whopping 72% of licensing revenue, an anomaly that was both surprising and noticed at the time. It was presumably explained by the unpredictable effects of the September 11 tragedy.
Transaction Size
The average transaction was $444,000 and $371,000 in Q4 and Q3, respectively. Excluding transactions less than $50,000, the average size was $776,000 and $736,000, respectively. These numbers are in line with data from the previous eight quarters.
In the front office piece that discussed the previous quarter, I mentioned that data refutes the many articles in the press contending that the days of multi-million dollar transactions are over. In Q4, Siebel closed 52 deals over $1 million, up from 44 in Q3. The CFO characterized the $1 - $3 million range as Siebel's "sweet spot." There were eight transactions in excess of $5 million, down from 10 in Q3.
Operating Margin
The September 11 debacle exacerbated the effects of a tech recession already in progress, resulting in a comparatively horrible operating margin in Q3 -- a paltry 10.5% During that quarter's conference call, management was confident the company would "immediately" return to its targeted 20% operating margin without reducing head count more than normal. In Q4, the operating margin was indeed 20% and head count changed no more than expected.
Management expects the operating margin to increase gradually to 23% by Q4 of 2002. Three months ago, when the economic environment was much more uncertain, management was targeting 20% operating margins for the entire year. (If I were superstitious, I'd be very concerned that the last time management predicted a year-long increase in operating margin, it tanked big-time the following quarter.) To put those numbers into perspective, the operating margin for FY2001 was 17.5%.
Part of the reason the company was able to attain the healthier operating margin in Q4 was a gross margin of 47% for services revenue, an all-time high.
Competitive Landscape
Management feels that the company's balance sheet is a strong competitive advantage. Having added about $500 million in cash (using no external sources) during each of the last two years, the company begins the new year with $1.65 billion. In these Enron-sensitive days, the CFO stressed that the balance sheet is conservatively stated, that it is "transparent," and that there are no off-balance sheet transactions. He added, "Our revenue quality is spectacular."
In the sales force automation market, the company believes Pivotal is the #2 company (behind Siebel of course) with a 5% - 6% share, followed by Onyx and Dendrite. In the marketing automation market, Epiphany is believed to own a strong 23% share of the market, though still behind Siebel. Exchange Applications enjoys about 9% of it.
Similar to previous conference calls, the company reports that Oracle shows up in 5% of the competitive transactions, followed by SAP at 4%. Clarify and PeopleSoft (Vantive) show up in 2% of them.
Tom Siebel explored in great detail the difference in his mind between how SAP, Oracle and PeopleSoft compete on price. He feels the first two literally give away their CRM solutions when they compete with Siebel. He contends that though they announce big dollars, they bundle them in such a way with other products that allows them to account for the sales in any manner they choose.
As for PeopleSoft, he quoted notes about information he obtained in the marketplace. PeopleSoft apparently sold CRM product in a transaction for 100,000 UPS users at $30 each. In a $10 million transaction with the IRS that was part of the rumor mill awhile ago, it's his understanding that product was sold at $24 per user. In a deal for Lufthansa that included all of its airline partners, he believes a full CRM suite and customized software tailored to the industry was sold at $46 per user. Contrast all of that with Siebel's history during the last ten quarters in which the average fee per user was $1700 in the lowest quarter and $2250 in the highest, averaging about $2000 per user.
For at least four years the media has been playing up the idea that the ERP players are closing the gap in functionality and that they are poised to take market share away from Siebel. In response to that, Tom Siebel notes (not for the first time) that many of SAP's largest customers have standardized on Siebel's CRM product line. In Q4, revenue in central Europe and Germany (where SAP is located) was exceptionally strong. Revenue in Germany was up 140% year-over-year.
ERM
Again, no ERM revenue was itemized. The company believes it will be a $20 billion market next year. (Is that an adresssable market or an actual market? Heck if I know, but if it's the latter it seems unbelievably optimistic.) Regardless, Tom Siebel believes ERM will be larger than CRM though he has no idea how long that will take, mentioning that he doesn't care if it takes ten years.
Going Forward
Management believes its customers are "buying the vision." Just as Siebel had only one product (sales force automation) in 1995, and added call center software the next year followed by marketing automation, field service, product configuration, analytics, etc., the management team feels the customers are choosing to standardize on Siebel throughout the enterprise. The business model is based on that premise.
In a poll sent to 16,000 prospects in Siebel's database, 82% of the respondents said they would purchase CRM product in 2002. 71% anticpate implementing new CRM projects this year. And 57% intend to purchase Siebel product this year.
Management is guiding that services revenue will be flat in 2002 and that licensing revenue will grow 15%. (Tom Siebel feels the CRM market will actually grow faster but feels it's prudent to be more conservative in the planning process.) The tax rate is expected to decline from 37% to 36%. And to repeat the stuff about operating margin, it's expected to grow to 24% from 20% by the fourth quarter. For Q1, management is guiding no change in the revenue and the operating margin.
In a separate post, I'll run those numbers to show what we might be able to deduce. Management declined to respond to one analyst's back-of-the-envelope projection of $.57 EPS using those assumptions.
THE GORILLA GAME
To quickly summarize the numbers below, this Gorilla Game began 3 2/3 years ago and is hugely profitable despite that the two indexes are only marginally profitable. In the last two years which began near near the top of the bubble, the performance of the Gorilla Game has equaled the S&P 500 and has dramatically outperformed the tech-heavy Naz. However, all have lost considerable value during that period of time.
Since History
History 1/1/00 Annualized
Gorilla Game 217.56% -22.27% 36.99%
Nasdaq 7.63% -52.26% 2.02%
S&P 500 1.96% -22.94% 0.53%
The numbers for Siebel Systems as of the close of market, January 24, 2002:
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 $36.89 541.57%
The Final Tally
Stocks $31,651,62
Cash 104.08
Total $31,755.70
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 |
