Updated from 7:17 p.m. EDT

Siebel Systems'

(SEBL)

dismal forecasts came true.

The software titan, whose CFO warned in June that the second quarter might be even worse than a dreary first quarter, reported Wednesday a more than 40% decline in software license sales year over year and overall results that fell short of Wall Street's severely reduced estimates. Siebel, which eliminated bonuses last year to avoid layoffs, said Wednesday it would give pink slips to about 16% of its staff and warned that third-quarter numbers would come in far shorter than expectations.

"It's very weak out there," said CEO Tom Siebel. "There is just not a lot of business being done in the information technology market." Echoing comments he made last quarter, Siebel said it may be the "most averse macroeconomic environment in history of information technology industry."

And to make matters worse, there's no sign of improvement, he said. "Right now we don't see any reason why it should get any better in Q3 and Q4," Siebel said. "There does not appear to be any improvement in the medium term."

The maker of customer relationship management software reported net income of $29.8 million, according to generally accepted accounting principles, or 6 cents a share in the second quarter. That compares with a net gain of $76.6 million, or 15 cents a share, in the same period a year earlier. In the first quarter, Siebel reported net income of $64.6 million, or 12 cents a share.

San Mateo, Calif.-based Siebel said revenue fell 27.6% to $405.6 million from $560.2 million a year earlier, and 15.1% from $477.8 million in the previous quarter. Software license revenue fell 40.7% to $170.1 million from $286.8 million in the year-ago quarter and down 30.9% from $246 million in the first quarter.

Siebel's earnings were 3 cents short of the 9 cents expected by analysts and its revenue was $31.5 million short of the $437.1 million consensus estimate gathered by Thomson Financial/First Call.

On a postclose conference call, Siebel said it would bring its staff of about 7,164 employees to 6,000 and take a restructuring charge of $225 million to $250 million for severances and facilities closures.

Siebel forecast that total revenue in the third quarter would range from $355 million to $400 million, including license revenue ranging from $145 million to $180 million. Pro forma earnings, excluding restructuring charges, are expected to range from 5 cents to 8 cents a share.

That was short of the Wall Street consensus, which expected third-quarter revenue at $431.51 million and earnings at 9 cents a share.

Siebel was vague on his outlook for the fourth quarter, saying it could look like the third quarter. There is seasonality but it doesn't look like it will be substantial, Siebel said. "I'd like to sugarcoat this, but this is what's going on in the world," he said. "Bottom line: The market is tough."

In June, Siebel CFO Ken Goldman

told investors at a Bear Stearns & Co. technology conference that the second quarter is "every bit as challenging, if not even somewhat tougher, than it was in the first quarter."

Two months earlier, CEO Tom Siebel said the first quarter may have been the worst in the history of the software industry. At that time, Siebel added that he couldn't believe business wouldn't improve in the second half of the year.

Analysts lowered estimates in response to Goldman's comments, which some took essentially as a warning. But the fact that Siebel did not warn investors that its results would be weak before Wednesday's announcement could be an ominous sign for the other large enterprise software maker --

PeopleSoft

(PSFT)

-- that has not reported earnings yet, said Rich Petersen, an analyst with W.R. Hambrecht.

"The only piece of information that came out of that call that would be actionable in the near-term is it appears not all the software companies feel they need to preannounce," Petersen said. "I don't think PeopleSoft is quite priced to expect this level of bad news. I would be very nervous if I owned PeopleSoft."

Petersen has a long-term buy rating on Siebel because like analysts he believes it will benefit when the economy improves. He has a neutral rating on PeopleSoft. His firm hasn't done any banking with PeopleSoft or Siebel.

On the conference call, when Petersen asked Siebel why the company did not preannounce, Siebel responded that the call had been scheduled and experts had advised that a preannouncement would be "inappropriate." "We're not aware of any kind of public guidelines in that area," Siebel said.

Overall, Petersen said Siebel offers just more evidence that "there really has not been any glimmer of an uptick." But even as shares of Siebel sank in after-hours trading, Petersen said the stock is not going to look that cheap because limited earnings growth will keep the price-to-earnings ratio in the mid-20s.

"It's very difficult to find any investible trend other than sell it -- sell it all," Petersen added.

Analysts said the magnitude of Siebel's miss was surprising. Yet Wedbush Morgan Securities analyst Nathan Schneiderman pointed out that the company also showed surprising strength in professional services and maintenance. "One

interpretation is that Siebel is really fighting to get as much consulting business as it can as a way to keep the revenue number up," said Schneiderman, who has a long-term buy on Siebel. His firm hasn't done any banking with Siebel.

However, that could erode margins because professional services margins typically run at roughly 45% whereas software license margins are close to 100%.

Siebel also is being severely hurt by the reluctance of companies to sign large deals, Schneiderman added. The company reported closing only three deals valued at about $5 million in the second quarter, compared to nine deals in the year-ago period and 12 deals in the first quarter.

Shares of Siebel rose 36 cents, or 3.2%, to close at $11.74 Wednesday. Shares plummeted to $10.40 in after-hours trading.