Analysts Take Dim View of Siebel's Silence

The stock slides after executives play up certain initiatives but won't provide financial guidance.
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Updated from Dec. 3.

No news proved to be bad news for

Siebel Systems

(SEBL)

stock, which fell Thursday after the software vendor held a midquarter conference call a day earlier that offered few specifics on the company's financial picture.

Shares of Siebel were down 85 cents, or 6.2%, to $12.77 in recent trading.

Siebel Systems, which sells customer-relationship management software, said Wednesday that its recent foray into the hosted arena is exceeding expectations. Market interest in the company's hosted CRM offering, called CRM OnDemand, "is nothing short of overwhelming," CEO Tom Siebel said

But Sanford C. Bernstein analyst Charlie Di Bona said in a note Thursday that he is concerned increased operating costs for the OnDemand initiative, including advertising and sales, will hurt Siebel's operating margins. He issued estimates for 2004 that were far short of the consensus, with pro forma earnings of 23 cents a share on revenue of $1.36 billion vs. Thomson First Call consensus estimates of earnings at 28 cents share on revenue of $1.41 billion.

A lack of bad news and the prospect of an above-average fourth quarter should support the stock near term, Di Bona wrote. But a risk of a disappointment early next year could hurt the stock. Di Bona, who has an underperform rating on Siebel, suggested the stock is overpriced, trading at roughly 55 times forward consensus earnings before Thursday's drop. That's the stock's highest valuations in the last two years, even as growth expectations have fallen. (Bernstein doesn't have an investment banking business.)

Siebel, who was cited earlier this year for

violating Regulation FD, launched the conference call Wednesday with a laundry list of topics he would not discuss, including financial guidance, the pipeline of potential sales and his view of the economy.

Goldman Sachs software analyst Rick Sherlund griped on the call that Siebel "wiped out most of our questions" with his list of untouchables. Siebel responded that the last time he responded to questions like that it cost him $250,000.

Fair disclosure regulations would not prohibit Siebel, or any executive, from talking about financial issues or their business pipeline on a conference call. In fact, such calls have become the most common way for companies to comply with Reg FD and avoid "selective disclosures." Notably, Reg FD concerns didn't stop Siebel executives from talking up initiatives such as CRM OnDemand and their relatively new analytics business.

"That

CRM OnDemand has exceeded our expectations in every respect," Siebel said, though he declined to give specifics, such as how many beta customers are using the product.

CRM OnDemand, or CRM software available via the Internet at a lower cost than Siebel's other products, will be generally available next week. Siebel also said integration of the recently acquired hosted CRM company Upshot also is complete. The company plans to continue to support Upshot products indefinitely, but plans to merge its code base with Siebel's OnDemand offering.

Siebel's stepped-up effort in the hosted CRM space marks the company's second attempt to gain a toehold in the market, which primarily targets midmarket companies and divisions. Siebel is taking on rivals such as privately held

Salesforce.com

, and midmarket public players such as

Onyx Software

(ONXS)

and

Pivotal

(PVTL) - Get Report

in a relatively fragmented market.

Siebel cited a handful of metrics to back up the strong interest. He said 50,000 visitors have looked at a joint Web site on the product built by Siebel and partner

IBM

(IBM) - Get Report

, and said the company has more than 11,000 leads. Siebel said

BT Group's

(BTY)

British Telecom unit would sell hosted CRM in the U.K.

However, JMP Securities analyst Pat Walravens noted after the call that CRM OnDemand is unlikely to be a savior for Siebel's declining revenue because sales from the service will have to be recognized over the lifetime of contracts, rather than upfront, like other Siebel sales.

"You just can't move the needle selling hosted products at $70 per person per month because it takes too long to recognize the revenue," Walravens said. He has a market perform rating on Siebel, does not own the stock and his firm has not done banking with the company.

Pacific Growth Equities analyst Patrick Mason went further Thursday, estimating in a note that OnDemand could generate $115 million in 2004. But only $25 million to $30 million -- less than 2% of Mason's estimate for 2004 revenue -- will show up immediately on the income statement, he said. Mason has an overweight rating on Siebel and his firm hasn't done banking business.

Separately, Siebel Executive VP David Schmaier said there's still "a lot of runway" in the analytics business, which he said is the fastest growing in the industry, because only 300 of the company's base of 3,500 customers have bought the software. Siebel analytics has produced $140 million in revenue in the first three quarters of 2003, compared to $157 million in all of 2002.

Without the analytics business, U.S. Bancorp Piper Jaffray analyst Tad Piper estimates Siebel's revenue would be down 25% this year. Instead, analysts are projecting it will be down 18%. He has a market perform rating on Siebel and his firm hasn't done banking business with Siebel.

Despite its analytics growth, Siebel's license revenue -- a benchmark of new software sales -- has declined year over year for nine straight quarters amid the downturn in information technology spending, and more competition from software suite vendors such as

Oracle

(ORCL) - Get Report

,

PeopleSoft

(PSFT)

and

SAP

(SAP) - Get Report

. The company has responded with major staff cuts and restructuring.

The third quarter, however, offered a sign of stability, with license revenue up sequentially. Before that, 2000 was the last time Siebel registered a sequential jump in license revenue outside of the typically strong fourth quarter. Furthermore, CEO Siebel said on the call "we're done" with restructuring (and presumably with accompanying layoffs).