Siebel Reports Strong Fourth QuarterSiebel Reports Strong Fourth Quarter

Siebel Systems reported fourth-quarter earnings Wednesday that were its strongest in nearly two years. The maker of customer-relationship-management software posted a significant quarterly profit, and narrowed the gap between service revenue and what had been shrinking software license sales.

While some of the improved performance can be attributed to the traditional year-end surge in software purchases, Siebel's profit was large enough to nearly wipe out a sizable third-quarter loss and bring the company within several million dollars of a break-even for 2003. For the year, Siebel posted a loss of $3.4 million on revenue of $1.4 billion, compared with a loss of $35.7 million on revenue of $1.6 billion for the previous year. For the quarter ended Dec. 31, Siebel posted a profit of $41.5 million on revenue of $366.7 million, compared with a loss of $38.0 million on revenue of $394.7 million a year earlier.

Fourth-quarter licensing revenue was $150.3 million after not eclipsing $112.1 million in any of the preceding three quarters, while service revenue was $216.5 million. Most significant, licensing was 41% of revenue for the quarter after accounting for about one-third of revenue the previous three quarters. Several years ago, Siebel's licensing revenue routinely was far in excess of its service revenue.

Despite the positive signs, CEO Tom Siebel remained cautious in projecting the company's near-future financial performance during a conference call with analysts. He predicted that licensing revenue would be in the $110 million to $115 million range for the first quarter of 2004, rising to $120 million to $140 million the following quarter. Revenue for the first two quarters is expected to be between $340 million and $365 million, which would represent a modest improvement over 2003.

While the dependency of service revenue over the past two years might appear to signal a shift from on-premise CRM deployments to the hosted CRM model pioneered by companies like Salesforce.com, Siebel maintained that he expects hosted CRM--an area Siebel Systems expanded into in late 2003--to account for just 10% to 15% of the market going forward, with the bulk of that business coming from companies that would not otherwise have considered purchasing CRM software. But that view hasn't prevented the company from making investments in the hosted CRM model, including the acquisition Tuesday of Ineto Services, a provider of hosted call-center capabilities. "If it turns out we're wrong and it's bigger, that'll be OK with us."

Siebel told analysts to expect a continuation of the company's acquisition strategy with a mix of large and small deals likely to unfold in 2004, but he stressed that Siebel Systems will maintain its conservative approach to entering new markets, as was the case with its decision to begin offering hosted CRM services. "We will not enter a market unless we're confident that we can maintain a 50% share of that market," he said. This year, Siebel Systems plans to get aggressive selling custom offerings to vertical markets.