The Siebel War
The Bull Argument
By
Paul Commins (TMF Buster)
My, how the tables have turned. It wasn't that long ago that this week's bear, Mike Trigg, was stepping into the Fool's Duel cage for the first time. Mike played the bull for software powerhouse Oracle <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq:ORCL)") else Response.Write("(Nasdaq:ORCL)") end if %>, while the bear role was filled by yours truly.
Now, bear for Oracle is hardly the kind of cushy assignment that we fight over at Fool HQ, but I agreed to talk trash about this much-respected company, in part, to help the new kid get off the blocks. Starting smartly indeed, Mike compounded my sacrifice with a strong first outing, showing me up and proving that he doesn't need any favors.
OK, sandbagger. It's payback time.
Truly, I don't envy Mike this week. Finding a weakness in Siebel Systems <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: SEBL)") else Response.Write("(Nasdaq: SEBL)") end if %> is akin to finding a single-bit error in a multi-gigabyte execution stack. To tell you the truth, I'm not sure there is anything to find.
As a result, my opponent -- like so much bear meat in Duels past -- will surely resort to a valuation argument. "Siebel is priced to perfection!" he'll holler. If this happens, I'm ready to respond, but, just in case, let's first establish the obvious.
I don't have to tell anyone that business today is being fundamentally changed by digital technology. In the '90s, this movement was all about the back office. Big consulting firms were pushing Enterprise Resource Planning (ERP) software as the ideal complement to the MBA revolution du jour, business process re-engineering. These ERP applications are focused on cutting fat from "inward-looking" corporate processes, like production planning, financials, and human resources. In short, ERP is all about cutting costs.
What about the other side of the business coin, increasing sales? Good question. Today, the ERP revolution has wound down, but, of course, the world of business consultants has furnished a replacement movement, with software to match. In his initial Motley Fool Research report on Siebel Systems (now available for free download), Foolish enterprise software guru John Del Vecchio put it this way:
"Today, however, it is not uncommon to see zero-inventory business models, outsourced labor, and increased use of technology to enhance productivity. Now, information creates competitive advantage. Effective use of information to identify, attract, retain, and foster relationships with customers can help a firm gain a competitive edge. Customer relationship management software is a tool that businesses can use to build and leverage their relationships with customers."
In this still-emerging, white-hot market -- dubbed Customer Relationship Management (CRM) -- Siebel is the undisputed king of the hill. Exactly as predicted by former Oracle salesman and co-founder Tom Siebel, the business software flight of fancy has followed the traditional flow of manufactured goods, from the loading dock, through the back office (all ERP), and now to the outward-facing functions of business, namely marketing and sales. In other words, it has finally arrived at CRM, and into Siebel's waiting arms.
The arrival of the Internet has only hyper-boosted the CRM market in three key ways. First, the Internet has added two new sales and communication channels -- the Web and e-mail -- to the phone, fax, mail, and on-site visit. These additions have added power, but have also increased complexity when it comes to managing customer communications.
Second, laptops and now wireless devices have fundamentally improved the ability of field sales and service representatives to stay in touch with the home office, in real-time and with easy access to rich product and customer data. And third, Web stores generate customer data, as a byproduct, that is expected to revolutionize targeted marketing.
Just how hot is Siebel? Well, starting from a base of $221 million in 1997, Siebel has grown total revenues by an average of 89% per year over the last two years to $791 million in 1999. And in the first six months of 2000, Siebel has been even hotter. Sales are almost $700 million, nearly 120% ahead of last year at this time and on pace to crack the annual $1 billion threshold with ease.
Could it be just another Internet sales growth phenom without a solid business plan? Not by a long shot. Although still spending heavily to widen its lead in an emerging market, Siebel posted $0.22 per share in profits in 1998, and more than doubled this figure in 1999.
Could these be padded profits bolstered by an overly generous sales force bent on meeting aggressive quotas? Nah. Sales are actually growing faster than the receivables ledger, with days sales outstanding dropping to 74 in the most recent quarter, from 88 a year ago. In fact, with a Foolish Flow Ratio recently dipping below 1.25, Siebel now meets all the quantitative targets for a Rule Maker. To achieve this kind of financial position, at this early stage of a new game, is nothing short of stunning.
Best of all, Siebel has no serious competition at the moment. Their Rule Maker numbers reflect a dominant position in the CRM market, where they boast nearly 20% market share, with no other contender in double figures. And this dominance extends to the middle market, where Tom Siebel claims for his company, in a recent CNBC interview, 53% of CRM sales to companies making less than $250 million annually.
Let's compare Siebel to Ariba <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ARBA)") else Response.Write("(Nasdaq: ARBA)") end if %>, the leader in another white-hot business software market, namely business-to-business (B2B) Internet commerce platforms. While Siebel has a slightly higher market capitalization, $38 billion to $27 billion for Ariba, it has nothing like Ariba nemesis Commerce One <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMRC)") else Response.Write("(Nasdaq: CMRC)") end if %> on its heals. While Ariba sweats cutthroat competition for each B2B contract, Siebel is strolling toward establishing the corporate CRM standard.
Desperate for some Siebel flaw, can we make the case that Siebel has gotten smug with success, uniting competitors and potential partners against them? Hardly. Siebel joins other enterprise software newcomers Ariba, i2 Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ITWO)") else Response.Write("(Nasdaq: ITWO)") end if %>, and BroadVision <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BVSN)") else Response.Write("(Nasdaq: BVSN)") end if %> as significant partners to the new IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %>. As part of its grand e-business plan, IBM signs pacts with these "best-of-breed" providers, offering them an unparalleled sales network and a non-compete promise. In return, the little guys just recommend IBM hardware and implementation services to their growing lists of new customers.
Siebel also jumped early onto the Enterprise Application Service Provider (ASP) bandwagon, when many software companies still foolishly viewed third-party ASPs as competition. Working with ASP leader USinternetworking <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: USIX)") else Response.Write("(Nasdaq: USIX)") end if %>, Siebel offers its software served monthly, for a set fee, without large, up-front costs and installation headaches. This nudges their product within the reach of smaller companies, those without the IT budgets or personnel to handle a full-scale installation.
I could go on and on about this company, but it's time for the sacrificial bear to step forward. My guess is that he won't attack Siebel, the company, anyway. There just isn't much to attack.
Instead, Mike'll go after the absurdly over-valued stock price and try to convince you that, as good as the company is, there is no stock market upside left. When he's done, be sure to check out my rebuttal, where I'll be ready, if called upon, to put up some powerful numbers to the contrary. You'll see plenty of daylight ahead, for both Siebel and its stock price.
Yes, ladies and germs, it's payback time...
The Bear Argument »
