Siebel Systems Inc.'s warning Tuesday that its sales last quarter were significantly short of expectations has analysts watching and waiting to see whether Siebel's problems are short-term and company-specific or are a sign of broader weakness in the enterprise applications market.

Siebel said it now expects license revenue for the quarter, which ended March 31, of about US$75 million, its lowest level since 1998. Siebel estimated its total revenue for the quarter at $297 million to $300 million, below its earlier management guidance and below the $337.5 million consensus forecast of analysts polled by Thomson First Call.

Siebel Chief Executive Officer (CEO) Mike Lawrie attributed the shortfall to both soft demand and execution problems at Siebel. In a conference call with analysts, he promised quick action to improve Siebel's financial performance, including discretionary spending cuts and, potentially, management changes. Further details on what changes Lawrie will implement will be available April 27, when Siebel releases its full results for the quarter.

The news slammed Siebel's Nasdaq stock (SEBL) on Wednesday, sending it down nearly 10 percent to close at $8.26.

Siebel has already been in a belt-tightening mindset for several years, and its headcount has steadily declined, from 8,300 in 2001 to just over 5,000 at the end of 2004. Earnings warnings are almost routine; Siebel last issued one in 2004's second quarter, when its license revenue fell to $94.8 million.

Siebel's core focus is selling CRM (customer relationship management) software to run corporate sales and marketing functions, a market it essentially invented. With about three million end users running its enterprise applications, twelve-year-old Siebel has the largest CRM installed base, but its growth has slowed as other enterprise vendors -- SAP AG and Oracle Corp. at the high end, Salesforce.com Inc. at the low end -- chip away share in the fragmented market.

Now, analysts say that market may not be enough to sustain Siebel. Piper Jaffray & Co. analyst Tad Piper said in a research note that Siebel's wide sales miss "was obviously not just normal seasonality" and "calls the growth of the CRM space into question." Smith Barney analyst Tom Berquist said that while he's inclined to believe Siebel's management when they say the problems are correctable operational issues, he doesn't anticipate much pickup in customer spending over the next few quarters. Berquist thinks it reasonably likely that Siebel will be acquired within a year.

Oracle also has struggled to grow its applications revenue in recent quarters, although its long battle with and acquisition of rival PeopleSoft created an unusual selling environment for the company. Germany's SAP has enjoyed a run of growth and solid quarters, possibly at the expense of its U.S. competitors.

Meanwhile, as several of the traditional enterprise applications vendors face slumping sales, the market's newer entrants are steadily closing the gap between them and the "tier one" vendors. Salesforce.com, which sells its CRM software as a hosted subscription service, has posted heady growth rates over the past few years. Now, it's on the verge of edging past some of the traditional vendors in terms of revenue, not just growth: Gartner Inc. predicts that Salesforce.com will be ranked third in enterprise application license revenue by the end of 2005, eclipsing the combined Oracle/PeopleSoft applications business.

If Siebel can't shore up its business and continues to face declining sales, it too could find itself pushed to the sidelines of a rapidly changing industry. Although Siebel has launched a hosted service, Siebel CRM OnDemand, its user base is currently about one-tenth the size of Salesforce.com's, and when it competes against Salesforce.com for new customers, it wins about half the time, according to company executives.

In one month, Mike Lawrie will celebrate his one-year anniversary at Siebel. Investors are getting impatient for results. Next week, institutional shareholder Providence Capital Inc. plans to hold a meeting in New York with other institutional investors, at which it will discuss forming a shareholder coalition to push for changes at Siebel. With dissidents waiting in the wings, Lawrie will need to work quickly to prove that Siebel still belongs at the pinnacle of the CRM market it created.

» posted by abennett

IDG News Service

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