October 18, 2002 7:25 AM PDT

Analysts: Siebel, Microsoft plan .Net link

Stoking speculation about how the two companies will work together, Siebel Systems CEO Tom Siebel denied rumors that Microsoft is set to acquire or invest in his business applications company.

During a third-quarter earnings call Thursday, Siebel addressed recent analyst reports that suggested Microsoft would soon make a minority investment in Siebel in conjunction with an expanded marketing and development partnership.

Securities analysts at Credit Suisse First Boston issued a research note Tuesday that predicted the two companies would announce a deal at Siebel's user conference in Los Angeles next week, where Microsoft Chairman Bill Gates is scheduled to deliver a keynote speech.

Siebel, which reported its first net loss since 1997, confirmed that the company plans to make an announcement next week about its relationship with the software giant, but added that "it is not Microsoft buying Siebel or Microsoft making an equity investment in Siebel." Siebel, however, hinted that the announcement would be big news.

With one possibility ruled out, analysts said it's likely Siebel and Microsoft will announce a technology deal in which the customer relationship management (CRM) software provider will plug into .Net infrastructure.

"We think the announcement may be along the lines of a technology agreement where Siebel is the first application vendor 'available' or 'certified' to run on Microsoft's .Net Server architecture," said Prudential Securities analyst John McPeake.

A technology pact with Microsoft would make sense, analysts said. JMP Securities analyst Patrick Walravens said that the Siebel 7 software isn't compliant with Sun Microsystems' Java 2 Extended Edition, an issue since J2EE has gained acceptance by enterprise customers. For its part, Siebel disputes Walravens assessment.

Nevertheless, if Walravens' assessment is common among corporate customers, Siebel could be teaming with Microsoft to ride .Net into enterprises. In addition, Siebel is unlikely to place its architecture bet on J2EE because "rewriting the component in Java would be a time-consuming and very expensive process."

According to Walravens, Siebel is likely to make the front end of its software application .Net-compliant. "In return, we believe that Siebel may sell OEM Microsoft BizTalk Server as part of the Universal Application Network initiative," he said.

Siebel is the biggest player in a multibillion-dollar segment of the CRM applications market. Microsoft is planning to break into that market later this year with the introduction of its own CRM applications, designed to help companies streamline sales, marketing and customer service activities.

Analysts, however, note that the Microsoft partnership could backfire on Siebel. Although it's still early in the game, IBM, a J2EE supporter, could move away from its CRM partnership with Siebel to focus on its rivals such as JD Edwards, said Walravens.

Shaky results
Judging from Siebel's third-quarter results, the company could use a little help pitching its wares.

The company reported a net loss of $92.1 million, or 19 cents per share. The loss includes restructuring charge of $109.4 million and a $54.9 million charge related to an employee stock-option buyout.

Excluding those charges, Siebel had earnings of $13.1 million, or 3 cents a share, on revenue of $357.2 million for the quarter ended Sept. 30. That compares with earnings of $35.2 million, or 7 cents per share, on revenue of $437.9 million in the same period in 2001.

Analysts expected Siebel to earn 5 cents per share, before charges, on revenue of $362.1 million, according to a survey by First Call.

Siebel also reported a 34 percent decline in license revenue, which is considered an important indicator of health for software companies. Siebel reported $126.8 million in license revenue, down from $193.5 million in the same period in 2001.

The company's outlook for the fourth quarter was also muted. Siebel predicted fourth-quarter earnings in the middle of the single-digit range, roughly on par with First Call estimates. Siebel said license revenue for the fourth quarter would be between $135 million and $165 million, below many analysts' projections.

CEO Siebel denied that the company is losing market share to SAP and PeopleSoft, and shot down worries about customer satisfaction and the CRM market in general. The feisty executive said the disappointing earnings were a result of a continued weak demand for information technology, but acknowledged that the company itself was also to blame.

"We are not pleased with these results," said Siebel. "The sales execution has not been good."

The company appointed a new global chief of sales this month after the resignation of Bill McDermott from the post. Siebel called the company's sales execution during McDermott's stint at the company "completely unacceptable," and said the company decided to make a change.

McDermott has since joined rival SAP as chief executive of its North America subsidiary. Siebel shot down speculation that SAP had lured McDermott away from Siebel.

Analysts weren't so sure. Siebel said it only saw competition from SAP on about 7 percent of its deals, but Morgan Stanley analyst Charles Phillips said that SAP "is a growing problem for Siebel."

"The company says it rarely sees SAP in competition which is probably true," said Phillips. "But a growing percentage of SAP customers are opting to stick with their incumbent ERP suppliers they already have."

If customers continue to stick with ERP (enterprise resource planning) software companies such as SAP for their CRM applications, it's likely that another Siebel acquisition rumor will surface. "We would be more positive if Siebel acquired or was acquired by an ERP vendor so that it could offer a broader suite of solutions," said Walravens.

 

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