THE FRONT OFFICE GORILLA GAME: Q3, 2002 -- PART 1
The News
Independent research conducted by Nucleus Research "found Siebel customers listed as references on the company's Web site experienced business results that directly contradict marketing claims from the software giant that its customers receive positive ROI in fewer than 10 months." A free copy of the report is available at www.NucleusResearch.com. There was lots of discussion about that in the conference call, noted below. (I intended to read the report while on vacation but decided instead to make my vacation a vacation.)
When Siebel announced its Universal Applications Network (UAN) in April, an impressive list of leading integrators and IBM supported the product. However, BEA Systems was noticeably missing from that list. Now BEA Systems is also supporting UAN.
Siebel 7 was upgraded to Siebel 7.5 and released in early September. It appears that the primary difference between Siebel 7 and 7.5 is that UAN is imbedded in the latter, allowing interoperability of Siebel's applications modules with integration servers. New applications modules were also introduced in Siebel 7.5.
I haven't seen any press releases, but apparently Microsoft and Siebel Systems will allow their three-year agreement allowing Microsoft to resell Siebel's mid-market CRM product to expire at the end of this year. Microsoft inherited that agreement in 2000 when it bought Great Plains Software, a mid-tier ERP player. This comes as no suprise considering that Microsoft will soon be launching its own mid-tier CRM product.
At Siebel's Users Conference last week, Microsoft and Siebel announced a multi-year global alliance to foster the sales of Siebel's applications and Microsoft's .NET. The alliance includes collaborative development, marketing, sales and support.
The last item is not anything having to do with Gorilla Gaming but it is of vital interest to investors. The Teachers' Retirement System of Louisiana, a public pension fund, has sued the company and each of its directors, complaining that the board violated Siebel's own rules when awarding millions of stock options to Tom Siebel.
Conference Call Overview
Many of the vital statistics and much of the information discussed by management in the conference call is also clarified in a highly informative series of pages that can be viewed in a PDF file at the following link: siebel.com
Having followed the company for five years, I never thought that I would ever hear Tom Siebel comment so negatively about his company's sales execution as he did in this conference call. Consider the following quotes:
"On the sales side, there is no question that we could have and should have performed better than we did."
"Sales execution in the last three or four quarters has not been good."
"Results in the U. S. ... were completely unacceptable."
"Our U. S. performance was breathtakingly bad."
Was he openly and frankly telling the truth or was he taking advantage of an opportunity to make his former VP of Sales a scapegoat? You get to decide. The new Sales Veep came on board in early September.
Income Statement
Total Revenue: down 18% year over year; down 12% from Q2
Licensing Revenue: down 34% year over year; down 26% from Q2
Service Revenue: down 6% year over year; down 2% from Q2
Pro forma EPS: down 57% year over year; down 50% from Q2.
EPS: -$0.19 compared to +$0.07 year over year; down from +$0.06 in Q2.
In the spirit of transparency, Tom Siebel made a special statement about the three criteria that must be met before the company recognizes revenue:
1) A license agreement has been signed.
2) Management believes the revenue is collectable.
3) The product has shipped.
He also openly blasted the analyst community for not requiring the same transparency of Siebel's competitors.
Free cash flow
Operating cash flow less ESOP tax benefits less capex:
up 103% year over year; down 13% from Q2.
The same calculation on a per-share basis:
up 120% year over year; down 8% from Q2.
Free cash flow for every dollar of revenue: $.15
Up 88% year over year; same as Q2.
Operating Margin
The operating margin in Q3 was negative $155 million, down from $37 million (a 9% margin) in Q2.
In my report last quarter, I surmised from statements in that conference call that management is (was?) targeting a 15% operating margin. Management's plan announced in the Q2 conference call to downsize the company to a size commensurate with its ability to generate revenue is on schedule and is expected to be completed in Q4.
The employee bonus and merit plans have been re-instated. However, neither has been re-instated for executives.
Market Share
Siebel reports that it continues to maintain or increase market share in every category. 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.
'01 '01 '01 '02 '02 '02
Q2 Q3 Q4 Q1 Q2 Q3
Salesforce Automation: 80% 68%* 80% 80% 80% --
Call Center Software: 72% 70% 72% 72% 76% 74%
Marketing Automation: 44% 46% 60% -- 70% 67%
Field Service: 57% 56% 58% 59% 65% 60%
Interactive Selling: 58% 55% 58% 66% 69% 69%
Partner Management: 73% 76% 76% 75% 79% 79%
Mid-market CRM: 55% 65% 67% 68% 68% 66%
Internet Self-service: ? 67% 60% 58% -- --
Analytics: 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.
If you look at the PDF file, you'll see that management made a huge point of stressing that, despite the poor sales execution of late and the downturn in IT spending, Siebel still has more enterprise applications software licensing revenue generated in the U. S. than any other company in the world. Based on world-wide sales, it is #2 behind SAP. And of course it is the largest CRM software provider in the world.
Compared with SAP, Oracle and PeopleSoft, Siebel is the only company to increase its share of U. S. enterprise applications in the last five years. Oracle's is the same as five years ago. The other two companies' share have declined in the last five years.
Comparing world-wide share of the enterprise applications market in the last five years, Siebel's share has increased.
Oracle's is about the same. SAP's and PSFT's share have decreased.
Comparing world-wide CRM licensing, only Siebel's share has increased in the last five years. (The numbers are all over the map. For further clarification, see the PDF file.)
Tom Siebel also made a point of saying that the above numbers that apply to the last five years also apply to the five last quarters. However, the quarterly numbers aren't given in the PDF file.
Other Numbers
DSO decreased to 72 days from 80 days in Q2. Management continues to maintain a target of 75 - 85 days. Payment terms decreased to 34 days from 36 days.
Domestic Licensing: 52% of total licensing, down from 66% in Q2
International Licensing: 48% of total licensing, up from 34% in Q2.
Reflecting again the poor sales execution, domestic licensing not only fell from Q2, it was much lower than expected. Many large and medium-size deals that were expected to close in the last week of Q3 didn't close. All of them are expected to close in Q4 and some have already closed.
Reasons for the delay: poor sales execution and in a few cases, the customer reviewed its own expenditures due to CFOs' concerns. Additionally, a couple of the deals were replacements of competitors' product. In those cases, the CFO decided to review issues having to do with writing off prior CRM investments. None of the delays were caused by competition.
Product Mix
New vs. Existing Customers
Licensing revenue from new customers was 62%, up from 57% in Q2. There were 415 customers. 175 of them were new and 240 of them were existing.
Notice that 58% of the customers were existing customers. For me, that leads to the points Tom Siebel made about the ruckus caused by Nucleus Research's independent study citing that Siebel's referencable customers are unhappy, not happy as reported in the report contracted by Siebel. (See the page about customer satisfaction in the PDF file.)
He explained that Siebel Systems has hired a company to conduct semi-annual customer satisfaction surveys since inception. In 2001, the selected company changed from Prognostics to Satmetrix. In 2002, Satmetrix issued a stock offering that was accepted by many companies including Siebel Systems. (I gotta wonder why in the world Siebel Systems, a company that has always insisted only in buying technology as opposed to market share, wants to own part of a company that conducts customer satisfaction surveys.) Siebel has no voting rights and he insists that he has no influence on Satmetrix management. Satmetrix also conducts surveys for the likes of PeopleSoft, IBM, Johnson & Johnson, Hewlett-Packard, Bell South and Nokia. Moreover, he reminded analysts that they have always been
invited to go to the Siebel Users Conference and talk directly with the customers.
Regarding verticals, Financial Services and Communications are up about 25%. Despite the weakness in the telecom sector, that has always been a strong vertical for Siebel. There is general weakness across all the other verticals.
Transaction Size
The average transaction was $305,000, compared to $370,000 in Q2. Excluding transactions less than $50,000, the average size was $565,000, compared to $690,000 in Q2.
In Q2, Siebel closed 24 deals over $1 million, 27 fewer than in Q2. (Ouch!) There were 3 transactions in excess of $5 million, the same as in Q2.
There were no concurrent transactions in Q3. (In the recent past, concurrent transactions of all software companies have come under scrutiny as a way of increasing revenue when the customers really didn't want product in the first place.)
Competitive Landscape
The company reports that PeopleSoft showed up in 5% of the competitive transactions, followed by SAP at 2% and Oracle at 3%. This is similar to reports of recent quarters. A new item that was added is that, typically, about 47% of the competition is CRM software produced internally.
ERM
There are now over 200 ERM customers, the same as reported in Q2. 22 new ERM customers were added compared to 50 in Q1 and 30 in Q2. Siebel has been selling ERM software since April, 2001.
Analytics Software
There are now over 200 analytics customers. 22 were added in Q3, compared to 50 new customers in Q2.
Universal Applications Network (UAN)
Being a carpetologist, understanding stuff such as UAN is not easy. The conference call gave me a clearer understanding of it than in the past, leading me to believe that this new product could be a lot more important than I used to believe.
Apparently 27% of an IT budget is spent on integrating applications. It's not unusual that companies have anywhere from hundreds to thousands of applications. As examples, General Motors has 5000 apps. Siemens has 400 ERP apps alone and none of them "talk to each other." Siebel's UAN attempts to help solve those problems and reduce the total cost of integrating apps by providing pre-built software that can run on any applications server. An Accenture study showed that UAN drives the cost of integration down about 60% compared to the cost of a custom integration. Integration might be a $150 - $250 billion market opportunity.
Siebel will be marketing UAN as a product that enables any kind of app to talk to any other kind of app made by any two companies. It is not being sold just to help market Siebel's products. The product is expected to ship in Q4.
Siebel 7 and 7.5 upgrades
Siebel 7 was released in December 7.5 was released in Q3. Over 800 customers have upgraded. 150 have already gone live with the release and about 100 - 150 are expected to go live in Q4. That's out of 3500 total customers.
Historically, 70% - 90% of customers upgrade the new release within 12 months. Upgrading is going much, much slower for Siebel 7 and 7.5 than for previous upgrades. Tom Siebel attributes that to a recessionary IT environment and concerns about war that didn't exist in previous upgrade cycles.
As a reminder, Siebel receives no revenue for upgrades. However, as upgrades occur, the sales force has opportunities to sell new applications modules. With fewer upgrades, there are fewer new modules being sold to existing customers.
Going Forward
The goal for Q4 is $135 - $165 million in licensing revenue. That assumes no significant change in the economy or in the typical seasonality in which Q4 is a big quarter for sales.
Siebel discussed a page in the PDF file showing that CRM is expected to be the second most demanded product category (among those compared) and that the product category has experienced the least penetration (again among those compared).
THE GORILLA GAME
Regarding the information reported regularly in this section, I will get to that tomorrow.
--Mike Buckley |
