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Mighty Siebel Has Struck Out

The software giant whiffs on earnings (for the first time), coming in 2 cents a share below third-quarter estimates.

Updated from 4:45 p.m. EDT

The terror has touched the bottom line of a titan in Silicon Valley.

Siebel Systems


, the Silicon Valley software stalwart that had managed to weather Wall Street's storm prior to Sept. 11, disappointed investors Wednesday for the first time since going public in 1996, turning in just half the earnings it had projected for the quarter.

The company said it earned $35.2 million, or 7 cents per share, on $428.5 million in total revenue. The firm said it saw sales of $193.5 million in its core software license business. After lowering their estimates several times during the third quarter, analysts were expecting earnings of 9 cents per share on $481.4 million in total revenue, according to Analysts had expected software license revenues to come in around $220 million.

During the same period last year, Siebel earned 14 cents per share on $481 million in revenue, including $308.8 million in software license revenues.

Before reporting, Siebel shares sold off dramatically, down as much as $4.16, or 19.3%, to $17.38. The company's results unexpectedly came out prior to the stock market's 4 p.m. close of trading; the company said it couldn't explain why. In after-hours trading, the stock continued its

plunge, trading at $16.75 on Instinet at 4:30 p.m.

The current miss comes after analysts had severely lowered their estimates. For instance, while analysts set an earnings bar of 9 cents for the third quarter, that was well below the 14 cents in earnings that Siebel projected during its second-quarter conference call, its most recent guidance on third-quarter numbers.

While the company said it had a tight handle on costs, its profit margin sank to 11%, far below the 20% margin that it aims for, and just half of the 22% it had a quarter ago.

Tom Siebel, the company's brash CEO, was uncharacteristically subdued. Not once on the call did he berate analysts for their reports, or pooh-pooh the predictions of the media. Instead, he simply said the business slowdown after the terrorist attacks of Sept. 11 contributed significantly to the company's sales woes in the last part of the month.

"Since Sept. 11, we've faced an economy and an environment for information technology that's been as difficult as any in the history of the information technology industry," Siebel said. "And it will continue to be."

Analysts, while acknowledging that terror in America has impacted all business, said the company was on the ropes prior to the attacks.

"They were already stretching," says Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray who rates the company buy. "We were already expecting a weak quarter, but this came in even weaker than we anticipated." (His firm hasn't done underwriting for Siebel.) He pointed out, though, that Siebel does nearly 60% of its quarterly business in the final weeks of its quarter, exactly when the initial effects of the attack slowed business overall to a near halt.

After surging on the flood of technology spending, and a sizzling demand for its main customer relationship management software in the late 1990s, Siebel has been struggling this year with sequentially lower sales numbers. Now, year-over-year comparisons also are faltering with the current miss.

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Although the company had managed to hit Wall Street's estimates until now, it did so only in some instances because those expectations had been tempered. Until today, the firm was regarded as one that would always make its numbers.

Siebel didn't provide any actual guidance for the fourth quarter or 2002, saying only that it was comfortable with current analyst estimates. Analysts are expecting 12 cents per share in earnings for the fourth quarter, and revenue of $527.5 million, including $225 million to $300 million in software license revenues. For all of 2002, Siebel said he was comfortable with current software license revenue estimates of $865 million to $1.4 billion.

Siebel, who was espousing economic gloom and doom for different reasons on the company's two prior quarterly conference calls, did so again Wednesday. But his reasoning was changed in a way that investors could not have imagined three months ago.

"The pipeline's definitely there; we're very optimistic about that," Siebel said, referring to the potential deals the company anticipates for its fourth quarter. "The issue is what is going to be the business environment. How many of our customers are going to be willing to open their mail? How many of our customers will be unwilling to get on airplanes to meet with us?"

Of course, what's even scarier, from an investment standpoint, is the fact that a company of Siebel's caliber missed the mark so badly. The company's widely regarded as having top-tier management and a will-do sales force. That could be a particularly bad omen for lesser companies.

"If the mighty Casey can't get a home run, it's pretty ominous for the rest of the hitters," says Eric Upin, an analyst at Robertson Stephens who rates the company buy. "You have to argue that Siebel is top of class in management quality, execution capability and the power of its sales force. This does not bode well." (Upin's firm underwrote Siebel's IPO in 1996.)

At the same time -- and perhaps even more unsettling -- analysts were impressed with how much business the company was able to get done, given the circumstances.

"That's the thing; as you look around and across the whole industry, these guys still continue to stand out as relatively OK," says Brent Thill, an analyst with Credit Suisse First Boston, who rates the company buy. "Tom's been very adamant about the operating environment, saying that if we get into really bad waters, they've got a really big boat to make it through. All the smaller boats, though, will be taken up in the storm and won't exist on the other side." (His firm hasn't done underwriting for Siebel.)

Of course, terror isn't the only thing Siebel has to worry about in terms of its business. Another nagging concern for the company has been increased competition. While many smaller software companies that focused on Siebel's main customer software space have shuttered or have been acquired, bigger software firms have moved in on Siebel's turf.

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now all have more compelling customer relationship management, or CRM, offerings and analysts say Siebel's been feeling the heat from them. The company was so ruffled, in fact, that it emailed analysts to take Oracle to task after it reported its own quarterly numbers.

Tom Siebel played the effects of those competitors down, claiming that none had "commercially viable products." Analysts weren't buying that line completely, though.

"Before, Siebel was in first place, and there wasn't even a second-, third- or fourth-place player. Now, there's Oracle, SAP and PeopleSoft," says Robbie Stephens' Upin. "If it's not just one of them they have to worry about, it's the three of them combined."

If only that were all the company had to worry about.