Siebel Is Stuck on the Seesaw


By Sarah Lacy Early optimism that 2005 would mark the year Siebel Systems (SEBL) stopped its three-year revenue slide faded on Apr. 5 when the software company pre-announced first-quarter sales of between $297 million and $300 million, 12% less than most analysts were expecting. In one day of trading, Siebel shares fell 9.7%, to $8.17.

The ugly news comes as an extension of several choppy quarters for Siebel (see BW Online, 3/30/05, "Charting a New Course at Siebel"), which is falling into a pattern of missing Wall Street expectations in one quarter and beating them in the next. In a conference call on Apr. 5, Chief Executive Michael Lawrie said many big deals didn't close before the quarter's end, making it possible the San Mateo (Calif.) company's second-quarter sales could surprise on the upside, continuing the seesaw pattern.

FAR FROM PEAK. But even if that happens, don't be fooled into thinking Siebel has turned around, says analyst Patrick Mason of Pacific Growth Equities. Its core business, selling software that corporations use to manage sales forces and customer service, is shrinking at an alarming rate, thanks to a lukewarm tech-spending environment and competition from big companies like SAP (SAP) and Oracle (ORCL) and from upstarts like Salesforce.com (CRM).

Revenue for new software licenses totaled an estimated $75 million in the first quarter, down 53% from the fourth quarter of 2004, and 42% from a year ago. At its peak in the fourth quarter of 2000, Siebel sold $365 million worth of such licenses. Mason estimates that it sold just $35 million of its main customer-relationship-management software in the first quarter of 2005. The last time sales of its core product dropped that low was in 1997, just a year after Siebel went public.

Because it will take a lot to reverse the downhill momentum, a harsh reality is emerging for Siebel: It's time to put its $2.2 billion cash hoard to work -- or put out the "for sale" sign. It doesn't take a genius to see it's a fat target for a hostile takeover in its current state, according to Mason: "They better do something with the cash, or just say, 'Buy us.'"

SHAREHOLDER PRESSURE. Siebel's cash and potential as an acquisition for a larger software company are the only things keeping the shares at a lofty price compared to those of its peers, analysts say. Siebel trades at about 35 times earnings, while the average software company trades at 22 times.

So it's no surprise Siebel investors are starting to pressure the company to make a move. On Apr. 5, Providence Recovery Partners, a large shareholder, invited other shareholders to a meeting to discuss Siebel's options. The Wall Street Journal reported that Herbert Denton, president of the fund, said he intended to lean on Siebel to do something with the cash or start courting buyers.

Siebel could also use its dough to buy back stock, issue a dividend, or make a big deal. On the acquisition front, the best bets would be to bolster its business in so-called analytics software -- which helps companies make better sense of their corporate data -- or in cheaper pay-as-you-go versions of its customer-management software. These are two areas in which Siebel is showing growth, but not enough to boost the whole company.

SHORT-TERM OPTIMISM. True, the first quarter has grown tougher for everyone selling big multimillion software contracts, because buyers are pushing their spending to the second half of the year. But Siebel's problems run deeper. Even Lawrie admitted in a conference call that his company had execution issues when trying to close some deals.

That said, a good second quarter is entirely possible. But for most investors, it'll take several quarters of steady growth to make Siebel shares worth the risk. Lacy is a reporter for BusinessWeek Online in the Silicon Valley bureau


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