Siebel Reports Lower RevenueSiebel Reports Lower Revenue

The good news for Siebel Systems Inc. is that the customer-relationship-management software vendor's second-quarter carnage was no worse than it warned of two weeks ago. Now the hard work begins, and Siebel is planning to engineer its recovery by attacking the small and medium-sized business market with its on-demand CRM offering amid stagnant demand among corporate IT departments.

For the quarter ended June 30, Siebel posted a profit of $8.2 million, or 2 cents a share, on revenue of $301.1 million, compared with a profit of $9.8 million, 2 cents, on revenue of $333.3 million a year earlier. License revenue for the quarter was $94.8 million, the lowest Siebel has reported in five years. While Siebel remains profitable, the performance was clearly a source of concern to new CEO Mike Lawrie and analysts alike, coming at a time when Siebel and other major software vendors appeared to be in a period of slower growth. "We didn't perform very well for our shareholders during the second quarter," Lawrie said glumly during a conference call with analysts Wednesday. "We did not return value, period."

Lawrie and other Siebel execs pointed to a number of factors--most notably an apparent software slump indicated by numerous earnings disappointments, indecision on the part of corporate IT buyers -- that contributed to its lackluster results. But after facing repeated questions about what may have caused the unexpected drop-off in license revenue, CFO Ken Goldman ran out of explanations. "I can't really provide any more color on Q2, other than the fact that I'm glad it's over."

That's not to say there was no good news. Siebel reported that sales of its analytics software were up 54%, to $23 million, while demand for its Unified Application Network integration architecture also was healthy. It also managed to cut expenses by $37 million over the first six months of the year, accounting for nearly all of its year-to-date profit of $39.9 million, and said its total number of users was up to 2.6 million, a 53% increases from a year ago. Despite such isolated successes, Lawrie didn't sugarcoat the task the company has in front of it: "The focus of the management of Siebel Systems will be to take decisive action," he said. "There have clearly been gaps in our execution. We're moving quickly to make sure these gaps are filled."

Lawrie expanded on comments he made during the company's pre-announcement call on July 7, saying that Siebel would be focusing hard on generating new revenue, refining the company's financial structure, and beefing up its leadership. The most visible move Siebel has made is the formation of a product group that reports directly to Lawrie and is focused on selling the company's on-demand CRM service into small and midsize companies, which Lawrie said represent 50% of all IT spending.

But Yankee Group analyst Sheryl Kingstone says that will be trickier than it sounds. "When in doubt, everyone shoots for the SMB market," says Kingstone. "The problem for Siebel is, it hasn't proven it can deliver in that market." She says the business model for on-demand software--which defers much of the revenue by eliminating up-front licensing costs in favor of monthly subscription fees--isn't going to help Siebel turn things around by the end of the current quarter. The fact that the third quarter is historically sluggish gives the company time to recover, but, Kingstone adds, "if they have a bad fourth quarter, then I'm really worried."

Lawrie also said the company had brought in two new senior executives--Bruce Cleveland, a former Siebel exec who takes over as senior VP of the new SMB group, and Eileen McPartland, who becomes senior VP of the global services unit. The company also will be adding staff to its banking vertical group--a new focus in light of the $70 million acquisition this spring of Eontec, a maker of retail banking teller systems--as well as its services business.

Elsewhere in the CRM world, Salesforce.com Inc. said its first quarterly results as a public company would disappoint, with revenue and profit both expected to come in lower than analyst estimates. The news sent Salesforce.com's stock tumbling 27.2%, to $11.70.