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How Deep Will Siebel Cut?

There's some dispute about how many positions the firm will be cutting.

Updated from July 15

Ever since

Siebel Systems

(SEBL)

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announced another reorganization earlier this month, rumors have been swirling around how many employees will get the ax this time around. The latest magic number was 1,200, a number attributed to an unnamed source Tuesday by an analyst at ThinkEquity Partners.

But analysis from other Siebel watchers suggests that may be too high.

In an industry note on enterprise software, ThinkEquity analyst Yun Kim said the cuts, the third round for the embattled customer-relationship management software maker, will affect all departments, not just sales and marketing, and amount to 21% of the customer-relationship management software company's workforce. Earlier this month, the company

said it would reorganize its sales force, drop some lines of business and slash a layer of management in the wake of a disappointing second quarter. At that time, CEO Thomas Siebel also warned that San Mateo, Calif.-based Siebel would not meet financial projections.

A Siebel spokeswoman declined to comment on the estimate but said the job cuts would be discussed at the company's earnings call July 22.

Kim, on the job for just two days, does not have a rating on the company but called the cuts a "positive for Siebel." "We believe that the company is taking a big bullet now by re-tuning its bloated operating cost structure to support a more likely revenue run rate that will result in a fiscally sound operating margin going forward," he said. His firm hasn't done any banking with Siebel.

Kim estimated a 20% cut in Siebel's operating costs at the current revenue run rate will yield about a 15% operating margin, which is the target stated by management on its last conference call.

However, others have suggested that the number could be much smaller. "Why would a company that is profitable and has more money in the bank than they know what to do with cut 1 in 4.5 employees?" asks J. Bruce Daley, executive editor of

The Siebel Observer

, an independent publication. He believes Siebel needs to reduce its workforce by only 6% to achieve a 15% operating margin. Double that to be on the safe side, he said, and the layoffs still would hit only roughly 500 employees, significantly less than Kim's 1,200 estimate.

A cut in the low-teen percentages may be more realistic, if estimates from other analysts made earlier this month are any indication. In a note released after Siebel announced the reorganization, Fulcrum Global Partners analyst Jamie Friedman estimated that Siebel will have to reduce its workforce by 10% to achieve mid-teens operating margins. (Friedman has a neutral rating on Siebel and his firm hasn't done banking with the company.)

Wedbush Morgan Securities analyst Nathan Schneiderman suggested a 12% cut in total expenses is needed to meet the 15% operating margin target and estimated Siebel's headcount may fall by more than 700 employees through attrition and layoffs. In the second quarter of 2003, Siebel's headcount totaled 5,589, according to Schneiderman. (He has a buy rating on Siebel and his firm hasn't done any banking business with the company.)

In fact, some of those cuts will come through Siebel's so-called "workforce improvement program," Schneiderman noted. Historically, Siebel's policy has been to conduct employee reviews every six months and then fire the bottom, lowest-performing 5% of employees. The difference between the cuts this year and the numbers in the past, however, may be whether the employees are replaced. Last year Siebel slashed its workforce by 1,150, followed by 263 cuts earlier this year.

In recent trading, Siebel was down 17 cents, or 1.7%, to $9.84.