Siebel Systems Adds to Tech Misery

Updated from 7:55 a.m. EDT

Siebel Systems ( SEBL) shares tumbled Thursday after the company warned late Wednesday that second-quarter results would fall far short of analyst estimates. The company cited delays in purchasing decisions, an explanation that has been repeated by numerous software companies during this painful preannouncement season.

In recent trading, Siebel shares were down $1.07, or 11.6%, to $8.14.

San Mateo, Calif.-based Siebel, which makes customer-relationship management (CRM) software, said it expects total second-quarter revenue to total $301 million -- far short of the $353.1 million consensus estimate gathered by Thomson First Call.

The company said license revenue -- a key benchmark of new sales -- totaled $95 million. That's the lowest level for license revenue since March 1999, according to Piper Jaffray analyst Tad Piper.

"Overall, we remain a cautious stance on Siebel as competition in the CRM space continues to heat up and Siebel's market share may be deteriorating in key segments of the CRM market," Piper wrote in a note Thursday. Piper, who maintained his market perform rating on Siebel, was among a number of analysts who lowered estimates following the company's miss. (Piper Jaffray hasn't done banking with Siebel.)

In the wake of the warning, Pacific Growth Equities analyst Pat Mason downgraded Siebel to equal weight from over weight and significantly reduced his EPS and revenue estimates for fiscal years 2004 and 2005.

"With deal sizes shrinking and sales cycles lengthening for a company that depends on high average selling prices, at this time we feel visibility for growth is limited," Mason wrote. (Pacific Growth has not done investment banking for Siebel but does make a market in the stock.)

In a conference call late Wednesday, Siebel CFO Ken Goldman also said earnings should fall below the company's guided range of 5 cents to 7 cents a share, including a penny a share dilution from Siebel's recent acquisition of banking systems company Eontec. The consensus estimate fell at the high end of that range, at 7 cents a share.

Siebel said pretax income is expected to range from $12 million to $14 million, and operating income on a generally accepted accounting principles basis is expected to range from $2 million to $4 million. The company did not disclose its expectations for earnings per share, which analysts pegged at 7 cents.

Siebel said non-GAAP operating income, excluding various charges, is expected to range from $8 million to $10 million, and non-GAAP pretax income is expected to range from $18 million to $20 million.

In his first conference call since being hired as CEO in May, Mike Lawrie indicated that the company plans to take a number of actions to improve performance, "re-examining our financial structure to ensure improved profitability" and improving "the overall leadership capability" to ensure the company has the right team on the field, he said.

"Let me begin by acknowledging this was a very disappointing quarter," Lawrie said. "And I can assure you that there will be no excuses as to why we didn't perform to expectations."

In a press release, the company said the results were "primarily due to unexpected delays in purchasing decisions by certain prospects and customers near the end of the quarter." That was a refrain repeated again and again by software companies since the beginning of the week, including big disappointers Veritas Software ( VRTS) and PeopleSoft ( PSFT).

"The considerable magnitude of the shortfall, which drove Siebel's lowest quarterly license revenue in a number of years, also represents another data point indicating that the second quarter 'went out with a whimper' for a number of software companies as close rates ticked down unexpectedly in late June," First Albany analyst Mark Murphy wrote Thursday. (Murphy has a buy rating on the stock and his firm hasn't done banking with the company.)

Even before the software earnings parade began, though, some analysts were anticipating that Siebel would miss. On July 1, for instance, Merrill Lynch analyst Jason Maynard wrote: "Given the company's recent history, we would not be surprised to see preliminary results in the next couple of days.

"Feedback indicates the pricing environment for business applications remains very difficult, which has led to lengthened sales cycles as customers attempt to receive larger discounts," he continued. Maynard has a neutral rating on Siebel, and his firm has done investment banking with the company.

While acknowledging that Siebel needs to better execute, Goldman said the purchasing delays were particularly acute in deals worth between $1 million and $5 million -- what he called the company's bread and butter. Siebel closed 15 deals worth more than $1 million, just slightly more than half of its 29 deals worth more than $1 million closed in the first quarter. That drove down the average deal size to $317,000, a decrease of nearly $100,000 from $414,000.

The company closed three deals over $5 million, the same as in the first quarter.

"It's clear we're beginning to see a shift to a larger number of smaller deals," Lawrie said.

Despite the company's weak results, Lawrie expressed confidence about Siebel's opportunities going forward. "We firmly believe the demand is there," he said. "This is not an issue of demand, although it's also clear at the end of June things did become a little sluggish, and we also saw a significant shift to a larger number of small deals that had longer sales cycles than what we have seen in previous quarters and (that) required more levels of approval on the part of our customers."

In one bright spot in an otherwise bleak report, Siebel said its OnDemand sales climbed 28% sequentially. Lawrie denied that the new lower-cost service, launched to compete against ( CRM), caused the decline in average sales price, and he said the service was not cannibalizing sales of Siebel's traditional enterprise software products.

The other bright spot in the quarter, the company said, was maintenance revenue, which will total $115 million, within the company's guided range of $112 million to $118 million.

Services and other revenue, which includes OnDemand, totaled $91 million, slightly below the low end of the company's targeted range of $95 million to $107 million.

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