THE FRONT OFFICE GORILLA GAME: Q1, 2002
The News
In February, Siebel shipped three new (depending on how you define "new") products. It launched its eMedical suite of software. I'm not sure whether this is a totally new product or an enhanced version of an earlier product. Enhanced versions (definitely not completely new products) of the eConsumer Goods and eGovernment software were also shipped. All products are based on the Siebel 7 platform that shipped in November.
In March, PeopleSoft released the latest version of its CRM software and announced a plan to ship new and improved versions every six to eight months. Following its first industry-specific app for financial services companies introduced in December, a second vertical for the communications industry was also launched with the latest version. Following Siebel's highly successful lead (20 vertical suites that contribute about 80% of licensing revenue), PeopleSoft's move into the vertical market is symptomatic of a growing trend in the CRM software business.
In April, Siebel launched its Universal Applications Network, a product that reduces customization and, thus, total cost of ownership relating to integrating Siebel's CRM software with a web server. Siebel's propaganda is that, unlike the web-server-centric products, this one is customer-centric because it is vendor-agnostic. A slew of integrators and web server providers have agreed to the standard. Notably missing from the list is BEA Systems.
On the Fool's NPI thread, the announcement of the Universal Applications Network (UAN) generated substantial discussion. The discussion is related to the belief held by many that control of the architecture by the enterprise applications providers could some day be usurped by the dominant web server providers. If that happens, it's likely that the enterprise apps would become relatively commoditized. Some folks reacted to the press release about Siebel's UAN as the company's strategy to thwart the web server providers' attempt to take control of Siebel's destiny. Others (including me), see it as less dramatic. We see UAN as an understandable response to customer concerns about the complexity and cost of adapting software for use with web servers. As far as Siebel's PR about UAN is concerned, I believe Paul Philp (XaosSurfer is his screen name at the Fool) said it best when he said that at the core of UAN is classic FUD. It's an attempt to spread fear, uncertainty and doubt among potential customers who might be thinking of licensing CRM software made by anyone other than Siebel for use with a web server. While any attempt to allay customer concerns about ease of adoption of CRM product is important, I don't think UAN is so important that it's at the core of a strategy to keep the web server providers at bay.
If you're interested, take a look at Siebel's white paper about Universal Applications Network and decide for yourself. It can be accessed from the following web page:
siebel.com
Depending on your take on UAN, the biggest news of the quarter has to do with Microsoft. Earlier this month the media gave a lot of attention to Softie's announcement to enter the mid-market sector of CRM by the end of this year when they intend to ship Microsoft CRM. The product will be based primarily on technology acquired when the company bought Great Plains software last year (or was it in 2000?). Great Plains had an agreement with Siebel to resell its product. One report I read quoted a guy from Great Plains saying that agreement wasn't successful. Another report I read said that Microsoft does not intend to compete with terms of that agreement. Microsoft was widely reported as saying that they have no intention of moving upstream in the market to the larger CRM customers, Siebel's bread and butter. Many say that even if Softie does eventually move into that part of the market, they have very little success in the enterprise applications market and would be entering into it far too late to cause any serious concern to Siebel with all of its Gorilla characteristics. Others prudently take the paranoid role of keeping at least one watchful eye on Microsoft, even while sleeping.
Conference Call Overview
As I listened to the conference call, I followed my Q4 front office report. It was amazing to appreciate how similar the two conference calls were. The numbers were different, but not by a lot. The most essential points stressed by management and brought to light by analysts were identical on the two calls, with very few exceptions that I'll mention later in this piece. So, if you're interest in a review of the main points also discussed in the Q4 conference call, simply read my previous front office report found at:
Message 16963160
Three quotes from Tom Siebel pretty clearly show his view with regard to the health of the economy. He described Q1's economic climate as "a lot worse than anyone expected." It was the "worst IT-capital-spending environment maybe in history." Yet he also said, "I can't believe it's not going to pick up in the second half of the year."
Regarding the unexpected difficulty of generating revenue in Q4, 50 licensing deals in excess of $1 million that were expected to close in the quarter were postponed. Early in the call Tom said they were postponed to the summer. Later in response to an analyst's question, he said he had no hard data about how long the customers intend to refrain from making a buying decision. Decisions to postpone buying decisions were across all industries.
On a brighter note, acceptance of the relatively new Siebel 7 platform is better than expected. Some large deployments have already gone live (Gateway and Cisco) and more than 50 customers are in the process of upgrading. (Upgrading does not generate revenue for Siebel.) Though the new platform shipped as recently as late November, already 34% of the service requests are relative to Siebel 7.
And Siebel's customer satisfaction is higher than at any time in the company's history.
Q1 Revenue
Total Revenue: down 20% year over year; down 1% from Q4
Licensing Revenue: down 27% year over year; down 2% from Q4
Service Revenue: down 12% year over year; virtually unchanged from Q4
EPS: New accounting regulations were implemented in Q1. Had they been implemented last year, EPS would have been down 20% year over year. The comparison with Q4 adjusted for the new accounting regs was not provided.
Marketshare and other numbers
Siebel continues to maintain or increase market share in every category except internet self-service. Oddly, management provides details about that that contradict its assertion that market share is being maintained in all categories. The numbers provided below are management's estimate of market share of licensing revenue as a percentage of the top five competitors (not the total market):
'01 '01 '01 '01 '02
Q1 Q2 Q3 Q4 Q1
Salesforce Automation: 76% 80% 68%* 80% 80%
Call Center Software: 72% 72% 70% 72% 72%
Marketing Automation: 41% 44% 46% 60% not given
Field Service: 61% 57% 56% 58% 59%
Interactive Selling: 55% 58% 55% 58% 66%
Channel Management:** 65% 73% 76% 76% 75%
Mid-market CRM: 55% 55% 65% 67% 68%
Internet Self-service: ? ? 67% 60% 58%
Analytics: N/A N/A N/A N/A 65%
* Considering the large variance from numbers provided before and since then, I believe that stat is a mistake.
** In previous quarters management has referred to "channel management." Begining in Q4, 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 my assumption might be wrong.
DSO decreased to 70 days from 72 days in Q4. Management continues to maintain a target of 75 - 85 days. (Payment terms increased to 76 days, a symptom of operating in an unusually difficult economic climate.)
Domestic Licensing: 62% of total licensing, up from 56% in Q4
International Licensing: 38% of total licensing, down from 44% in Q4.
Product Mix
Regarding verticals, the mix was generally consistent with previous quarters. High-tech, financial services, automotive and life science sectors were particularly strong.
The revenue generated by the relatively newer product lines (PRM, ERM, interactive selling, and analytics) is increasing as a percentage of total revenue. There was a significant uptick in growth of public sector business.
Analytics Software: a new emphasis
Analytics software is the fastest growing product line. That's partly because it's so new. Siebel acquired its analytics technology when it bought nQuire last year. The expectation is that sales of analytics software this year will more than pay for that acquisition. Large deployments have been decided upon by Citibank, Cisco and CSX.
The analytics software works across all data sources in the enterprise, not just the CRM data. Siebel expects to be one of the largest analytics providers outside CRM and, as the numbers above indicate, already has the lion's share of the market within the CRM space. Rapid adoption of the product is attributed to the belief that their analytics software is much easier to use and performs better than the competitors' offerings. Analysts estimate that the market for stand-alone analytics this year is $200 million to $400 million.
New vs. Existing Customers
Licensing revenue from new customers was 55%, up from 54% in Q4.
Transaction Size
The average transaction was $406,000, compared to $412,000 for all of 2001. Excluding transactions less than $50,000, the average size was $710,000, compared to $739,000 for all of 2001.
In Q1, Siebel closed 53 deals over $1 million, one more than in Q4. There were 12 transactions in excess of $5 million, four more than in Q4.
Operating Margin
The operating margin in Q1 ws 19%, one point lower than in Q4 and 1 1/2 points higher than in all of FY01. In the January conference call, management's plan was to gradually increase the operating margin with the goal of attaining a 23% margin in Q4. That the margin slipped by one point in Q1 instead of increasing or remaining flat is an indication of the difficult climate for Siebel during the quarter.
Competitive Landscape
Management continues to believe that its strong financial health is an especially competitive advantage the longer the decreased capex continues. Despite clearly lower revenue, hiring of software engineers is up 30% over last yar. In recent quarters, R&D continues to increase gradually as a percentage of sales from about 8% to more than 10%.
The company reports that PeopleSoft showed up in 9% of the competitive transactions, followed by SAP at 7% and Oracle at 6%. That's higher for all of them than in the past.
Siebel replaced Oracle product at Lexmark and replaced SAP product at Dow Corning and a tractor company in Illinois whose name I couldn't clearly hear.
ERM
AGAIN :), no ERM revenue was itemized. However, it was revealed that ERM revenue was again higher than in any previous quarter. 50 new ERM customers were added including GE Capital, Reuters, Contryside Insurancce and Caterpillar. Major deployments at Alcatel, CompUSA, Fleet, Siemens, and Mariott have gone live. ERM is "one of the fastest growing products."
Going Forward
Tom spent a lot of time discussing the relatively low market penetration as an indication of the potential growth still available for the CRM industry and Siebel. He said analysts generally agree that growth of CRM this year will surpass growth of all enterprise software.
Management completed a study of CRM penetration in the top 20 companies of various industries. The numbers are as follows:
Global Communications 14%
Pharmaceuticals 11%
Insurance 8%
(unintelligible) 7%
Financial Services 6%
Oil & Gas 5%
Utilities 5%
Media 4%
Automotive 4%
Public Sector 1%
Consumer Package Goods 1%
Management also estimates Siebel's penetration of the Fortune 100 and 1000.
FORTUNE 100
Siebel customers: 8%
All 100: 5%
FORTUNE 1000
Siebel customers: 9%
All 1000: 4%
The increasing scope of Siebel's product line also fosters more growth over time. When Siebel was only selling sales force automation software years ago, the product was used only by the sales force. Now that the line has expanded to include partner management, analytics, ERM and the like, back-office employees are also using Siebel product. Virtually every employee in the enterprise is a potential user of ERM. And though agencies of local and national governments throughout the world don't have sales per se, virtually every citizen of a jurisdiction is a customer of some government agencies adopting Siebel product.
THE GORILLA GAME
I'm pooped. I'll provide the updated numbers on the Gorilla Game later this weekend.
--Mike Buckley |
