Update: Siebel Triumphs Over Analysts' Estimates

Front-office software maker Siebel Systems (SEBL) earned 24 cents per diluted share in the second quarter, ended June 30, to beat analysts' expectations.

The First Call consensus forecast called for second-quarter earnings of 21 cents, but most analysts expected the company to beat those numbers.

Profits for the second quarter ended June 30 rose 115% to $25.8 million from $12 million, or 12 cents a share, before a charge a year ago. Quarterly revenue jumped 83% to $164.4 million from $90 million a year earlier.

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The following story was originally published on 7/20/99 at 7 a.m.

SAN FRANCISCO -- Forget Siebel's second-quarter numbers. Analysts, who are expecting a strong one from the maker of customer-management software, are looking ahead to more troubling questions: How is the company faring with Oracle (ORCL) entering its market, and how quickly is it generating cash?

First Call's survey of 14 analysts predicts Siebel will earn 21 cents per share when it reports earnings Tuesday, compared with 12 cents in the same quarter last year. But most analysts say the Menlo Park, Calif., company could beat those numbers.

BancBoston Robertson Stephens analyst Eric Upin notes that the company has consistently beaten Wall Street's estimates for the past six quarters. So a positive surprise wouldn't be much of a surprise in itself. Upin, whose firm has underwritten for Siebel, has a strong-buy rating on the stock.

Instead, the focus will be on the company's health in the face of an aggressive campaign by Oracle. The leader in database software has been muscling into Siebel's market.

Oracle is eloquent on Siebel's prospects. Craig Brennan, senior vice president of Oracle's global customer relationship management group, said Oracle's front-office software sales surged to $90 million in its fourth quarter ended May 31, a 138% rise from a year ago. Brennan predicts those figures will continue to rise for Oracle to the detriment of Siebel's revenue. The effect should be seen in Siebel's earnings starting in the next six months, he says.

There are other concerns. On July 6, Adams Harkness and Hill analyst Ben Rose downgraded Siebel to sell from market perform, citing increased competitive pressures and an increase in the number of days sales outstanding, a standard measure of how fast customers are paying for goods.

"Over the last two quarters, Siebel Systems has recorded $40 million in net income, yet has generated virtually no cash," Rose wrote in the report. As a result, days sales outstanding rose to 99 days in the March quarter, up from 90 days in the previous quarter.

Rose also questions where Siebel's revenue is coming from. "The Sept. 30 '98 10-Q revealed that more than 10% of revenue was derived from 'related parties,' which seem to be defined as firms that are Siebel Systems suppliers as well as customers," he wrote. "This raises the specter of barter transactions, a particularly worrisome sign, as customer concentration has been rising." In 1998, Siebel's top 10 customers accounted for 22% of sales, but in the first quarter of 1999, the top 10 accounted for 34%, according to Rose.

Most analysts who cover the stock rate the company either buy or strong buy. Siebel has long been the dominant force in the front-office space and until now has boasted a winning track record. So Rose's downgrade came as a shock. Siebel shares closed down at 61 7/16 from a high that day of 65. The stock slipped further the next day, hitting a low of 54 5/8 before rebounding to close at 63 1/2 on Monday.

Though other analysts continue to be optimistic about Siebel's future, they admit that Rose's concerns are legitimate. The criticisms "seem to emanate from reasonable concerns," says Bob Austrian, analyst at Banc of America Securities, which has underwritten for Siebel. But he notes the quality of earnings concerns and increasing competitive issues aren't new and says they don't yet signal a "significant disease at the company... There's been much ado, but the question is: Is it much ado about nothing?" Austrian rates Siebel a buy, with an earnings per share estimate that matches the consensus.

At the same time, Austrian admits, "I hope they bring DSOs down. I would be moderately concerned if they were unchanged and disappointed if they went up."

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