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The News

I've got only one bit of news since the last report about three months ago. The longer I play this Game, the more I realize how important Rule #10 is.

A week or two ago we got a well intended but inaccurate report from the Fool's Siebel thread about what Tom Siebel might have said about Clarify in a presentation at the Siebel Sales Summit, a gathering of Siebel's worldwide sales force. Those of us who heard the conference call got clarification about that. In the call, Siebel said he had heard that a top person at Clarify had left the company and that the Clarify sales force had been rolled into Nortel's switch sales force. Remarking about Clarify's market share, he said that roughly 18 months ago they had 16% share, that it dropped to 14% about 12 months ago, and that it is currently 6%.

What does this mean for the Gorilla? One of its three largest competitors by virtually anyone's definition no longer has a sales force dedicated to selling front office products (Vantive and Oracle being the other two). That, no doubt, is the reason Siebel summed up the whole matter by saying, "For all intents and purposes they are about to disappear."

Hey, it's the only news of the quarter worth reporting (other than Siebel's tremendous success) but it ain't insignificant.

Siebel's Q4 Report

Product adoption continues to be very, very strong, especially for its size. Comparing Q4 with the same quarter last year, licensing revenue grew 109% and servicing revenue grew 113%. The combined revenue grew 111% to $582 million, a run rate of $2.3 billion, surpassing analysts' estimates by about 10%.

So much for all the talk about slower growth, huh. In fact, most of the buzz had been that the slowing U. S. economy would affect Siebel. To the contrary, domestic revenue was 27% higher than in Q3, the highest growth of the year. And despite what we've heard about slower capex by the telcoms, that sector's revenue was $300 million for the year though "just" $110 million in 1999. For more detail, in Q4 there were 80 deals greater than $1 million and 42 greater than $2 million. To wrap up the issue of growth, Tom said that though customers are cutting budgets in anticipation of slower growth in 2001, "it is clear to us that customers are increasing investments in customer-facing solutions."

Regarding market share, Siebel reminded everyone that management's thinking from the day the company opened the doors is that history tells us that a software vendor that dominates the market will ultimately enjoy roughly 50% market share, that the #2 vendor will get only 15% and that the #3 vendor will only get 10%.


This report is interrupted to present to you a flashback.

Remembering that I still have the report that I sent to friends in early 1997 (one year before the manual was published) based on my initial study of the front office software market and that the piece had a quote from Tom Siebel about those numbers, I read the report again. Using his thoughts about that and other information in my report, I extrapolated that the company could reasonably grow from $54 million in trailing sales at the time to as much as $154 million revenue less than two years later in 1999. Ummm, they did nearly $800 million that year.


Back to the conference call, Siebel added that while he believes the company might gain as much as 60% share in some sectors, anything more than 70% is nearly impossible. His management team believes that Siebel now owns the largest market share in every category it sells and that every category showed increased market share in the most recent quarter.

His reporting of market share was essentially the same as last quarter's report with the one detail (if I understand John Del Vecchio's report from that call which I didn't hear) that the numbers are now clarified to be not the total market share; they are the licensing share and they are a percentage of the top five vendors' sales. I might not have heard the numbers clearly about the channel management and call center software sales; did they remain roughly at 50% or did they increase to 60%? Regardless, the point is that market share grew dramatically in 2000 in every cataegory and Tom expects market share to continue increasing this year.

An important point is that there were 6 verticals in 1999 and there are now 10 verticals producing a whopping 78% of licensing revenue. The company's customers grew from 1600 in 1999 to 3000 last year fostered by growth from 67 offices to 130 and an increase from 500 partners to 700. There are now 12,000 certified Siebel experts in what Tom calls Siebel's "ecosystem."

The mid-market tornado. I peg the numbers for the last four quarters at roughly the following:

Q1 -- $24 million
Q2 -- $60 million
Q3 -- $130 million
Q4 -- $145 million

It will be interesting to see if the tornado has ended so quickly. 12% growth between Q3 and Q4 really isn't the stuff of tornados. This will be interesting to follow.

The Financial Statements

The power of a Gorilla is ultimately manifested in the financial statements. Comparing pro forma Q4 with the same year-earlier period, gross margins for both licensing and service revenue increased slightly. The really big change, though, is that the total operating margin increased from 20% to 28%. (Operating margin is the profit after all expenses except one-time charges and before taxes.) The reason the operating margin grew so much is because of the slightly incresed gross margin coupled with a large decrease (relative to sales) in the cost of sales and administrative expenses; the company picked up some efficiencies making the decrease possible. The bottom-line result is that the net margin increased from about 15% to 18%.

Management expects the net margin to increase gradually to about 22% in Q4 of this year. While the tone in last quarter's call was that management was still looking to increase market share all of this year rather than profit margin, the tone in this call was that they can do both at the same time. That's true Gorilla power if it works.

Other stuff:

In the Q3 Front Office report, I mentioned that it was clear to me that management didn't know how they wanted to manage the assets of which, after having been spun off a year ago, was brought back into the fold in Q4. For the first time, we heard the details about that in a rather frank manner. Thinking that Siebel Systems was a comparatively large, lumbering company that couldn't move quickly enough to satisfy the needs of, management spun it off hoping that with its own board and management team it could act more quickly, more decisively. However, "they were not demonstrating the quickness of foot, responsiveness that we liked to see." was brought back in with the intent of accellerating growth, figuring that maybe Siebel Systems wasn't as slow and lumbering as had been thought. Much ado can be made of that, but it should be noted that Tom acknowledged that currently produces revenue that is equivalent to nothing more than a rounding error relative to the entire enterprise. My hunch is that is kicking's butt.

Future growth of the value chain (mtnlady, shut your eyes; you DON'T want to see this. :)

Tom Siebel made it very clear that he's not interested in purchasing any kind of company that extends their offerings beyond CRM. He's not interested in buying a trading exchange or a supply chain company. Instead, he'd rather partner with companies to make it easier to deliver Siebel products so they are meaningful to the customers. To that extent, he will continue to acquire companies at an increasing rate if it helps to get a particular technology and strong technologists improving Siebel apps.

There was tons more information during the conference call, but nothing else especially important to Gorilla Gaming that I can think of. Maybe others can add some perspective that went by me.

The Front Office Game

Because I spent so much time sorting out the myriad details in the conference call, I'm not going to spend any time discussing the numbers of the Gorilla Game other than presenting them as follows:

Since History
History 1/1/00 Annualized
Gorilla Game 574.31% 65.05% 209.83%
Nasdaq 57.36% -30.20% 30.82%
S&P 500 22.51% -7.41% 12.78%

The numbers for Siebel Systems:

5/25/98 5/1/99 4/11/00 Current From First
Buy Price Buy Price Buy Price Price Purchase
SEBL $5.75 $9.61 $52.47 $78.47 1264.70%

The Front Office Gorilla Game (not a real-money portfolio) was begun with $10,000 and four stocks in equal dollar amounts on May 25, 1998. Using the rules of the Game, I gradually eliminated all gorilla candidates until only the stock of the Gorilla (Siebel) remained as it does today.

Commissions are based on $8 per trade. The value of earnings on invested cash is not calculated; those earnings would have been so insignificant that no meaningful lesson could have been learned from them.

CAVEAT: I own shares of Siebel Systems. In the past I have owned long and short positions of Siebel's competitors (including some that were at one time "in the Game") and reserve the right to do so in the future. Most important, please, please don't make any investment decisions based on anything coming from my keyboard. Do your own homework!

--Mike Buckley

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