Grant,
Nice to end the weekend with our continued discussion of Siebel.
First, let's discuss the definition of a tornado. If you and I can do that successfully, we might accomplish something no one else has done. :) Looking at several references in the book, the authors think of a tornado as revenue "approaching" 100% year-over-year with quarter-to-quarter increases sometimes being as high as 30% to 40%. That's why I used 25% quarterly increases though it's not documented in the book. 20% quarterly increases result in slightly higher than 100% annual increases. The authors aren't big on quantifying anything, so we'll have to take a stab at what a tornado really is.
... as of last quarter, year over year revenue growth was 67% for licenses and 124% for maintenance/consulting revenue. Maintenance/Consulting revenue has almost caught up to the license revenue and is growing at a much faster clip.
For the record, non-licensing revenue increased in the most recent quarter to 30% of total revenue, up from about 25% in the previous two years. Non-licensing revenue won't ever catch up with licensing revenue, or at least I sure hope it doesn't as you'll see in my following comments.
For software applications companies, we need to keep our eye on the licensing growth, not the maintenance and consulting growth. It's the licensing growth that defines the company's internal growth. Think of licensing and maintenance/consulting as being similar to a car dealership's business. They've got to sell the cars before anyone can bring them in for servicing. The same is somewhat true for enterprise-wide software companies in the sense that they don't get the services fees if they don't sell the license to the product.
It's actually a dangerous sign to see the non-licensing revenue equal to the licensing growth (the one exception being Dendrite because of a completely different business model they are using.) If you look at the software app companies that have had trouble in the past, their total revenues might not have suffered tremendously but a close look at licensing revenue showed serious set backs.
I believe companies were creating products optimized for Windows during its battle with IBM.
Probably true, but companies also wrote apps to work with both the Windows and the Mac platform. As we know, even Softie developed their apps to work with the Mac.
Relative to that issue, the more I think about it I don't really care (though I'm happy to have some one change my mind about this) if a company is or is not developing software to work exclusively with Siebel's software. If it also works with competing front office software it helps grow the total market. Siebel will benefit from the larger pie and will presumably get their larger and larger piece of it. I would be concerned if companies were not lining up to be part of Siebel's value chain when they were lining up to be part of the competitors' chains, but that certainly has not been the case.
I don't know if the deals with Sun and Compaq are exclusive arrangements in any way. The 10Q isn't up yet so I have only read the press releases about those deals. There was no mention of exclusivity.
By the way, I ran a valuation just for the fun of it. I realize a lot of people are complaining that Siebel stock is 20% down from its highs. But I see very little number crunching these days in the folders to susbtantiate either concern or enthusiasm. Right now Siebel's trailing PE is about 80% higher than its estimated growth rate through Year 2000. For a wannabe gorilla of Siebel's status, my guestimate is that the stock is probably about fairly valued to slightly over valued. All the analysts' quarterly and annual revisions in the last thirty days have been on the upside, so that's a good sign.
--Mike Buckley
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