Siebel Smiles

Siebel Systems (Nasdaq: SEBL  ) is the first major software or technology company to restate its fourth quarter guidance this year, and the news is good-to-mixed. The good news is management increased its year-end earnings outlook, upping fourth quarter estimates to $0.08 per share, 33% above the $0.06 projected last October.

Fourth quarter revenue guidance was bumped to $365 million from previous expectations of approximately $345 million. An important metric to watch with software firms -- license revenue -- is now expected to rise to $150 million in Siebel's fourth quarter, nicely above estimates of about $130 million, and 35% higher than third quarter results.

License revenue numbers indicate how well a software firm is growing its client base by signing new contracts. Renewal and service revenue accounts for most other revenue. With $1 billion in annual sales, Siebel is a leading seller of customer service software, called customer relationship management (CRM) ware. Sales have declined since 2001, but with today's news, it appears corporate spending is starting to pick up again.

"Across the board we saw an improved business climate for investing in information technology," Siebel's CEO, Thomas Siebel, said in this morning's conference call. The company is witnessing improvements in Asia, Europe and the Americas. In fact, the fourth quarter was Siebel's best operating quarter since the first quarter of 2002.

We mentioned earlier that today's news was "good-to-mixed." It's mixed because Siebel's fourth quarter guidance given last October looked conservative, so topping those numbers, while nice, wasn't as surprising as it could have been. Additionally, Siebel reminded that one quarter does not a trend make; there's no guarantee this strength will carry into the new year. In fact, quarter one will likely see a seasonal downtick.

From quarter four 2002 to quarter one 2003, sales declined from $394 million to $333 million. Meanwhile, last quarter's $355 million is still well below 2002's quarter four results, but at least it's a step in the right direction. Many such steps are needed. The $15 stock trades at 35 times its $0.43 per share in trailing free cash flow -- a 25% premium to the industry average. Why so high? Perhaps because management expects operating margins to improve all year due to steps taken in 2003, and with that, the free cash flow multiple should contract.

However you cut it, investing in information technology (IT) companies near the bottom of a spending cycle, as now may be, makes much more sense than buying at the top of a cycle, when share prices are rich and year-over-year comparisons very difficult.


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