THE FRONT OFFICE GORILLA GAME: Q2, 2002
The News
This is a test. Which of the following news items are in the category of Rule #10 and, thus, should be ignored? My answer is located elsewhere in this post. Part of the test is finding my answer to compare it with yours. :)
A Siebel exec estimated that the partner relationship management (PRM) market will be $1 billion in four years.
IBM is devoting 2000 consultants and 300 researchers to a business practice it calls e-Workplace that appears to be a combination of everything from online yellow pages and instant messaging to human resources (HR) and employee relationship management (ERM) apps. The Intranet Journal says that "Gartner estimates the e-workplace market could be worth $12 billion in 2002, rising to as much as $53 billion by 2005. By 2006, the research firm believes that close to 80 percent of companies with e-business operations will have included an e-workplace program into their IT infrastructure." Unfortunately, no details about the ERM portion of the business was provided.
Siebel's ERM software can be accessed by IBM's application server. Portlets include Accounts, Projects, New Contracts, My Opportunities, My Classes, My Courses, My Curriculums, New Services Requests, and Expenses. Portlets that access Siebel's CRM apps are also under development.
Microsoft announced in Q1 that it would release CRM software for the mid-market and followed up in Q2 by unveiling it. The initial offerings are sales force automation and customer service software. Pricing will be $395 to $1295 per user. (Siebel's average price of the software it sells to the top-tier market is about $2000. I don't know pricing of its mid-tier products.)
Microsoft also made a $1.3 billion offer to buy Danish firm Navision. Though the deal was recommended to shareholders by the Navision board, I haven't heard if the deal was approved or closed. This European acquisition would complement Softie's acquisition of U. S.-based Great Plains and shore up its global presence in the mid-tier CRM market.
Siebel Systems was running ads in Germany, SAP's homeland, making statements that compare SAP's and Siebel's CRM track records. A court ruled that all of the ads are banned in Germany. There was no hearing. The ruling was not based on any mis-statement of facts in the ads.
Reuters and Siebel "will integrate Reuters' financial solutions with Siebel's eBusiness Applications software. ... The firms said the collaboration will provide financial advisors with real-time access to customer information and allow them to proactively manage their accounts."
Conference Call Overview
When it comes to CRM growth, this is the most disappointing Siebel conference call I've ever heard. Licensing revenue and total revenue fell more than at any time in the past. Tom Siebel said it is "prudent to be anything but subdued in our outlook going forward" and added that they "don't see any reason why [information technology spending] should get beter in Q3 and Q4." Don't sugarcoat it, Tom.
Income Statement
Total Revenue: down 28% year over year; down 15% from Q1
Licensing Revenue: down 41% year over year; down 31% from Q1
Service Revenue: down 14% year over year; up 2% from Q1
EPS: down 60% year over year; down 50% from Q1.
Operating Margin
The operating margin in Q2 ws 9%, down from 19% in Q1. 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. When I extrapolate from goals about revenue and costs per employee, management is now apparently targeting a 15% operating margin.
There are two primary drivers of the dramatically decreased margin in Q2: a huge decrease in revenue combined with a decision to retain employees in anticipation of resumed growth that never happened. Management openly admits guessing wrong about the upturn and has decided to eliminate about 15% of its employees in the current and next quarter. Reductions will be approximately as follows:
Sales & marketing: 40% - 45%
Services: 25%
R&D: "a little less"
G&A: 12%
The employee bonus and merit plans have been re-instated.
Now that Siebel is providing cash flow statements with their earnings report (hooray!), I'm adding new metrics to this report:
Free cash flow
Operating cash flow less ESOP tax benefits less capex: up 24% year over year; up 11% from Q1.
Free cash flow for every dollar of revenue: $.22
Up 83% year over year; up 5% from Q1.
Marketshare and other numbers
Siebel continues to maintain or increase market share in every category except internet self-service. The numbers provided below are management's estimate of market share of licensing revenue as a percentage of the top four competitors, not the total market. (Previously it was reported as a percentage of the top five competitors, so I don't get it.)
'01 '01 '01 '01 '02 '02
Q1 Q2 Q3 Q4 Q1 Q2
Salesforce Automation: 76% 80% 68%* 80% 80% 80%
Call Center Software: 72% 72% 70% 72% 72% 76%
Marketing Automation: 41% 44% 46% 60% -- 70%
Field Service: 61% 57% 56% 58% 59% 65%
Interactive Selling: 55% 58% 55% 58% 66% 69%
Partner Management: 65% 73% 76% 76% 75% 79%
Mid-market CRM: 55% 55% 65% 67% 68% 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.
DSO increased to 80 days from 70 days in Q1. Management continues to maintain a target of 75 - 85 days. Payment terms decreased to 36 days from 76 days.
Domestic Licensing: 66% of total licensing, up from 62% in Q1
International Licensing: 34% of total licensing, down from 38% in Q1.
Product Mix
Thhere was no material change in the product mix. Adoption of typically strong verticals are showing symptoms of the recessionary environment. Newer sectors continue to do well.
New vs. Existing Customers
Licensing revenue from new customers was 57%, up from 55% in Q1.
Transaction Size
The average transaction was $370,000, compared to $406,000 in Q1. Excluding transactions less than $50,000, the average size was $690,000, compared to $710,000 in Q1.
In Q2, Siebel closed 51 deals over $1 million, two fewer than in Q1. There were 3 transactions in excess of $5 million, nine fewer than in Q1. Tom Siebel made a point that in the history of the software business, the really large deals are made when adoption is expanding and that they tend to be at a minimum in a contracting market. He expects the number of big deals to return once the CRM market resumes growth.
Tom Siebel said that the reason the sales cycle is lengthening has to do with declining IT budgets, not because the presence of Oracle, PeopleSoft and SAP in the selection process is delaying decisions.
Competitive Landscape
The company reports that PeopleSoft showed up in 9% of the competitive transactions, followed by SAP at 3% and Oracle at 5%. SAP's appearance is about half of that which reported in Q1. The other two are about the same. This is the second quarter in a row that PeopleSoft showed up much more often than in the past.
Oracle and SAP have been promoting the concept of one-stop shopping as the reason customers will prefer to purchase CRM from them instead of Siebel that has no ERP or database software offerings. Tom Siebel said that the market continues to refute the idea, noting that his company sold more CRM software than Oracle sold application suites. He also said that, in th U. S., Siebel sold more CRM than SAP sold suites.
He adds that it's understandable to him that SAP is giving away its CRM software to establish a footprint. On the other hand, he says PeopleSoft's strategy of selling CRM software at such low prices is "non-rational."
ERM
30 new ERM customers were added compared to 50 in Q1. Siebel has been selling ERM software since April of last year and now has 200 customers. We don't have any details about ERM revenue other than that managaement says it is growing faster than total revenue. The stats show that there were fewer customers signed up in the last six months since the release of ERM software than in the first six months.
Analytics Software
In Q1 a lot of emphasis was placed on the analytics software sector for the first time. 50 new customers were added in Q2 and management expects the sector to gradually become a larger percentage of revenue.
Siebel 7
The newest version of software was released in December. Over 700 customers have upgraded. 60 have already gone live with the release. That's out of 3500 total customers.
Historically, 70% - 90% of customers upgrade the new release within 12 months. In order to achieve 70% for this release, upgrading will have to be 3.5 times greater in the next six months than in the past six months. (Siebel gets no increased revenue as a result of upgrading.)
Though upgrading gives an opportunity for the salesforce to upsell any of the 100 new modules in the release, there is no reason for analysts to change their financial models.
Going Forward
The near-term goal is to achieve $260,000 annual revenue and $220,000 annual expenses per employee. Head count is expected to be 6,000 by the end of Q3, down from 7164 at the end of Q1. That implies an operating margin of about 15%, as noted above.
The cost of severence of the employees next quarter is expected to be about $25 million, a cash expense. The consolidation of facilities is expected to generate a $200 - $225 million non-cash expense.
Regarding concern about unused seats, Tom Siebel said that it's "less of a factor in our business than it is in some of the other enterprise applications software companies because we didn't tend to do enterprise sales with lots of users that were unused. [It's] not a significant factor."
His point addresses two issues. The first is that many companies have presumably downsized after having purchased software seats, leaving many of them unused. Customers won't buy new seats until all of the previously purchased seats are used. The second issue is undoubtedly related to Oracle's problem that two states have have apparently bought software seats in excess of the number of employees that could possibly use them. Neither the states nor Oracle have admitted to causing the problem, choosing instead to point fingers at each other.
THE GORILLA GAME
Considering that Gorilla Gaming has been under intense criticism, I'm compelled to remind readers of the reasons I play this Gorilla Game and am in the fifth year of regularly reporting the results. The sole purpose of playing this Gorilla Game is to provide anecdotal data presented in real time. Whether the data ultimately supports or refutes the authors' thesis is yet to be determined. It has taken this long to track the progress through expanding and contracting product adoption. However, we still haven't been able to track a subsequent rebound of increased adoption.
I'm proud that it is the only study I'm aware of that has done this over a long period of time. However, I wish there were many other similar Gorilla Games being played and reported on a regular basis as I've done. Whether this study gives its readers the information needed to decide to play real-money Gorilla Games or to stay far away from them, it serves its purpose. That's a decision each investor has to make indepent of other investors' thoughts and I can only hope the anecdotal information provided in these reports is helpful regardless of the decision.
Moving on to the numbers ...
When I began playing this Gorilla Game in May, 1998, the immediate returns were negative. After having played it for five months, the Game had lost 40% of its value while the S&P had gained 4%. The Game rebounded to a break-even value just two months later in December 1998 and has never seen negative returns since then ... until now when it is down 21%.
For those of you who think that the current downside volatility is worse than ever, the Game's volatility is no worse on the downside than in December 1998 or in November 1999. It's really unusual, though, that the S&P 500 has fallen 27% in only three months.
To show the dramatic change for the worse in the last three months, I've narrowly focused attention on the financial details to two categories shown below -- returns and annualized returns since the Game began. Both categories are shown as of the value three months ago and now.
As of As of
As of As of 4/21/02 7/22/02
4/21/02 7/22/02 History History
History History Annualized Annualized
Gorilla Game 217.56% -21.14% 36.99% -5.54%
Nasdaq 7.63% -28.94% 2.02% -7.25%
S&P 500 1.96% -26.17% 0.53% -6.28%
The numbers for Siebel Systems as of the close of market, July 22, 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 $9.07 57.74%
The Final Tally
Stocks $7,782.06
Cash 104.08
Total $7,886.14
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
P. S. Answer to the test: Rule #10 applies only to the news item about the court decision in Germany. |
