Taking Stock: Siebel: A Sign Of Good Things To Come?

Company execs keep saying their outlook is improving, and William Schaff always wants to believe it. But he actually thinks this time it may be true.
There's clearly a sign that things are starting to improve for enterprise software. Siebel Systems, a leading vendor of customer-relationship-management and enterprise applications (sales-force automation, call-center) software, said its first quarter of this year will be better than expected.

The company expects total revenue of $329 million, on the higher end of the original revenue guidance of $315 million to $335 million. License revenue is expected to be $127 million, up 13% year over year, and higher than the company's guidance of $110 million to $125 million. Maintenance revenue is expected to be $115 million, up 6% year over year. This number was at the high end of management guidance. Service revenue will be around $87 million, which is below previous guidance of $90 million to $95 million. This will put earnings per share at 5 to 6 cents for the quarter, versus the previous estimate of 4 to 5 cents. Analysts' consensus estimate was 5 cents. At quarter's end, cash on the balance sheet will be almost $2.1 billion (gross of $4.25 a share in cash).

All right, I admit that I keep looking for a silver lining in every positive announcement made by enterprise software companies. They keep saying their outlook is improving, and I want to believe it. I think this time it actually may be true.

The first reason I think it may be different is that Siebel says the average sales ticket in its first quarter rose to $414,000 from $370,000 in the previous quarter and $282,000 a year ago. More important, the large deals are starting to pick up, with new deals higher than $50,000 having an average ticket price of $657,000, up from $573,000 in the strong fourth quarter of 2003. Second, its biggest markets, telecommunications and financial services, are both recovering nicely. Clearly, customers are willing to pay more than in previous quarters for CRM and related applications.

But I also see a sign that maybe Siebel is making fewer price concessions for licenses and services. Combine this with the company's control of operating and marketing expenses, as well as greater sales productivity, and, in my view, investors are likely to see dramatic improvement in profits going forward.

Third, Siebel's improving business fundamentals are supported by the performance and actions of system integrators such as Accenture. The applications pipeline is starting to build, and any economic expansion will benefit companies like Siebel.

Unfortunately, competition is ever present. Names like Oracle, PeopleSoft, and SAP can give most companies nightmares. In addition, the CRM space, in my opinion, is a mature business, with its high-growth-rate years behind it. Strong client support is critical for retention, and that isn't cheap to provide. Product expansion also will be difficult as Siebel faces stiff competition in fast-growing spaces such as performance analytics and management applications.

Before I jump up and down too much over the recent financial news, we all know that Siebel, along with many other enterprise-software companies, has managed guidance to unusually low levels. Beating the consensus shouldn't be that hard, in my view.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.

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