lengthy interview with the COO via zdii.
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Q&A: Siebel Systems' Patricia House
By Sergio G. Non
May 4, 1999 3:32am
ZDII
zdii.com
Market growth leaders in the technology industry are often marked by an air of self-confidence bordering on brashness, and Siebel Systems Inc. (Nasdaq: SEBL) is no exception.
It's easy to see why. While the enteprise market for back office software products has tanked this year in the face of Y2K worries, demand for customer service, marketing and sales applications remains strong, and Siebel remains the dominant vendor in that field. In the first quarter, the maker of front office applications saw revenues rise 80 percent year-over-year, while net income soared more than 119 percent.
The company expects things to continue at the same pace. First Call's consensus estimate predicts solid EPS growth of 53 percent this year and 28 percent in 2000, but that hasn't stopped Siebel's stock from languishing over the last three months: the stock closed Monday at 38 13/16, down slightly from the low 40s in early February. Still, Siebel executives like Patricia A. House remain upbeat about the stock's long-term prospects.
You can read more about it in excerpts from Inter@ctive Investor's recent interview with House, Siebel's chief operating officer:
ZDII: Your net income doubled year-over-year, how much of that growth came from market share gains and how much of that is the growth of the overall market?
House: I don't know if I know how to answer that. We are growing at unprecedented rates in a marketplace that is growing at unprecedented rates, so to tell you that I've got the statisticians on this one figuring out what did I take out of other people's hands, I don't know.
I can tell in well over 50 percent of the deals that we won, there were market competitors. In the others, we were unopposed. I don't know if that helps or not.
ZDII: Certainly your competition's been making some noise, Oracle's been banging some shoes on the table --
House: It's my experience in the marketplace as a marketing executive that when you have product, you sell and promote product, and when you don't, you bang shoes on the table and make noise. There are only two alternatives in life to get attention.
ZDII: Having said that, how concerned are you about competition in the marketplace?
House: We saw Oracle in 2 percent of all of the transactions that we even approached this past quarter. You can't discount them, but 2 percent is, after all, 2 percent.
ZDII: How about some of the other ERP players out there? Anyone on the horizon?
House: No. Certainly, Baan has -- well, maybe you can explain that one to me. They've evaporated, I think. I think they really have. I think they're dealing with internal difficulties that are hard to comprehend from the outside. SAP seems to be entirely focused on this back office problem. And Peoplesoft, I can't even figure that one out, to tell you the truth.
I didn't mean to be vague. We have not seen a presence from any of the back office software players, at all.
ZDII: maybe the answer to this is obvious, but is that a good thing for the market that you're playing in?
House: To some extent, I think it's a non-issue in this market, but I think it's an issue as it relates to something else that I want to talk to you about.
This front-office marketplace is anomalous in so many ways. It's the fastest-growing segment of application software, bar none. It appears to be, in the aggregrate, a larger business than the back office marketplace in total, and we have the number one market share in this market. Our customers are really flagship customers. We have great partnerships. We have a phenomenal financial position. We have a seasoned management team that's been together for years. And we have a very weak competitive field. So in terms of the market conditions here, I really don't know how they could be better.
In terms of the back office though, I think that thing is a minefield. And so as it relates to the health of SAP and Peoplesoft and Oracle and Baan, I think you've got some companies that reeling, I really do. It's a difficult equation (for them) to solve.
Because at the same time their customer base is dealing with the single most significant customer satisfaction issues they'll ever face, around this approach of Y2K -- and that's all-consuming of their resources -- they're also trying to make two paradigm shifts at once. One is to pick up their technology and re-architect it to the Internet base. And at the same time, pick up their technology and rewrite it for its functionality in the front office.
Now those three things on the plate at once looks like a daunting job. And I think some of the back office companies are going to make it and some aren't. We're starting to see the writing on the wall as they shift out there: mass exodus of marketing teams, tremendous flailing around in terms of market strategy.
What did you call it, shoe banging? I think it's a good reference: people banging shoes on tables, and noise making in the absence of a very clear, articulate, calmly thought out, well-orchestrated product delivery, customer support and partnership strategy. I think you're seeing the external indicators of internal chaos at work in those companies.
ZDII: That sort of turmoil in the back office marketplace has sort of spilled over, at least on the stock side, to other ERP sectors. How long will it be before the stock market sees what you're saying is a clear difference between ERP sectors?
House: I think you're starting to see it. Both Soundview Financial Group and BT Alex. Brown wrote some really interesting research nailing that issue, where they're saying that everybody kind of got swept up in the same fear factor. They wrote some really interesting reports saying, "Hey folks, from an investment standpoint, these are two radically different markets, front office and back office. And back office is saturated and front office is just barely at its infancy." And in the same breath, they both upgraded Siebel to a "strong buy". And this was before our earnings report.
And so I think you're seeing it. I think you're seeing a real differentiation in people's minds. To tell you the truth, I think there are some companies in the front office who haven't done well, and it's not because the market isn't there, I think it's an issue of execution: management teams turning over, products slipping schedules, mismanaged forecasts and all sorts of issues that can only be chalked up to bad execution.
We're in a market where the conditions are as favorable for success as you could write in your fantasy world, and we've got companies who didn't make it, and that's an internal execution issue. And you know who I'm talking about.
ZDII: Some of them were mentioned already. But one thing you did mention are Y2K concerns obviously affecting the back office end. Why isn't that affecting the front office stuff as much?
House: I spend about 33 percent of my time with current customers and prospective customers, so I will speak from the position of dozens, maybe hundreds of customers that I work with personally.
And the answer is, this Y2K thing, from a back office standpoint is pretty high stakes poker. If you've got an application that's supposed to be recording accurate data, and you've got it finally shored to the point, or you think you're going to have it shored up to the point, come Jan. 1, that it's going to appropriately report the date change, you're not going to let anybody mess with that. You're not going to by any chance let anybody upgrade it, or add any modules to it. That baby is frozen, it's on the shelf, it's under lock and key. And you can understand that.
That does not mean that these organizations do not have large IT budgets, are not rapidly marching forward to apply information technology to better enable their sales, customer service and marketing people. They absolutely are. They're just not doing it in a fashion that in any way is going to disturb this existing safe place that most of them think they've gotten into, related to manufacturing and accounting.
I'll tell you, I spend a ton of time on the road. I see absolutely no slowdown, in fact, the opposite. We are being pushed and prodded everywhere we go to accelerate organizations' deployments of our products even faster. Can we add some professional services people onto the Andersen team? Can we do anything to augment their team to get it faster deployed? Can we help the configuration?
And it's everywhere. It's in Europe, it's in North America, it's in Asia, it's in Latin America. It's across every product line we have, from sales to marketing to customer services. It's across every vertical market we play in, from financial services, to transportation, to telecommunications, to pharmaceutical, to professional services, to consumer goods, to utilities, to government. It's pervasive, the demand in this market is almost impossible to describe.
ZDII: How long do you expect to maintain the kind of growth rates we've been seeing so far?
House: Remember, we are a public company, so of course we can't talk in specifics about our forecasted future growth. However, we do say two things.
One is, we are very comfortable with financial analysts' expectations for us. And second, we use a pretty leveraged model in our business, where we have tremendous partnerships with Andersen and Price Waterhouse and Siemens Business Services and Cap Gemini and Cambridge Technology Partners and Ernst & Young, etc., who help install these applications. And typically, in these large applications, the gate to growth is less in the ability to build the software and sell it, than it is with professional resources to get it installed and configured. And as you probably saw in announcements from Andersen and others, as they see a slowdown in the back office, they're putting more and more resources toward their professional service offerings in the front office, which makes it an even easier challenge, if you will, for Siebel to find the available capacity to appropriately configure and install Siebel applications.
ZDII: A lot of ERP companies seem to be going toward providing their own services. Is that something you think Siebel is ever going to do?
House: No, I think if you dig under the covers a little bit, I think the answer's pretty clear as to why.
Look at Peoplesoft, or Baan or Oracle, for that matter. If your application license business is slowing down, boy, you've got to make up that revenue somehow, and there's typically, for a software company, only one other place to turn, and that's to build a huge professional services business.
Now our philosophy at Siebel is a partnering philosophy. Even though our partners install most of the Siebel projects, we typically have a person or two from Siebel on each of those teams helping to do technology transfer, and that's at the request of the integrator as well as the customer. So you'll see us continue to do that, which by definition means as we continue to scale the business, we will continue to scale professional services commensurately with it.
And to the extent that we have an occasional customer who wants to do the installation themselves, and they want some help from Siebel, or even we've had the occasion where the customer requires that Siebel do the installation of that product -- when that happens, we will of course do everything in our power to accomodate that customer, so we will have some professional capacity that can address that.
ZDII: Looking at your customer list, there quite a few international clients there. How much of your revenue comes from that overseas market?
House: I don't have the specific numbers in front of me, but 30-some percent of our revenue this quarter came from international customers, which is exactly in line with where we thought it would be. So it's huge.
ZDII: Is it your impression then, that some of the global financial turmoil we were seeing is now receding?
House: You never want to say that you're resistant to economic forces, but even at the lowest points of the Japanese economy, we were beating the numbers on our forecast, which tells me that organization really believe that installing these applications is not optional. It's a matter of survival. It's the area that was being invested in, no matter what the economic conditions were?
ZDII: You looking at any acquisitions?
House: Our primary growth strategy is what is often called organic growth: more of the same. More products, more sales reps, more customers, and that alone is a pretty healthy clip.
To the extent that there are technologies or services or products that enable us to do a better job at what it is we already do in our target market space, we would consider acquisitions.
ZDII: But it sounds like it's not a major part.
House: Absolutely not. I think you might be asking a question underneath: "Hey, Pat, is the revenue growth that we've come to expect from Siebel dependent on your identifying and making an acquisition."
And the answer to that is, no, it is not. It's the market growth itself, and the rate at which we're accelerating into that market growth, which drives our forecasted company growth.
ZDII: Would Siebel be open to someone else saying, "We want to buy you"?
House: I'll come back to where I started. We're in the fastest growing segment of the market space, it's amazingly small penetration, we have the great fortune to work with some of the most incredible companies in the world, customers love us, our products get number one ratings, the financial performance is great, we love what we're doing -- we'd be hard-pressed to find something we enjoy more than this, so there really isn't a motivator to change that.
ZDII: I was just looking at some of the numbers, your gross margins are obviously excellent, 84, 80 percent. Do you expect to maintain that? I noticed it slipped a little bit, year-over-year.
House: Now you know you're asking me some questions that, as (an executive with) a public company, I just can't answer, in terms of prognostication about future financial performance. But as our CFO Howard Graham always tries to give guidance to the financial analyst conference calls, he says it's pretty standard in the software industry that 20 percent margins are healthy and strong, and we, as you pointed out, sometimes go over that. It is not our endeavor to be changing the benchmarks by which successful software companies are measured. |
