Only a chosen few hit that sweet spot in the corporate life cycle when they dominate their markets, are growing fast, and competitors are racing to catch up. Think Microsoft, Intel, or Oracle in their primes.
In the sizzling sector of customer-relationship management (CRM) software, the company that's inspiring envy is Siebel Systems (SEBL ). With a commanding 70% share of the CRM software market, Siebel is poised for explosive growth. Its CRM packages help companies better manage information about customers and better handle their dealings with them. That in turn can give companies both a marketing edge and a productivity boost -- key in these brutally competitive times. No wonder CRM is now hyped as the next frontier in corporate software. There's only one hitch for Siebel: New competitors are entering the fray in droves, and the question for investors is whether Siebel can hold onto its huge lead.
Many analysts think the answer is yes, and that the San Mateo (Calif.) company will remain the leader for several years. Forecasters say a lot of stretch room is certainly left in the business. Researchers at Aberdeen Group predict CRM sales will hit $14 billion this year and could swell to $24 billion by 2003. And that should leave space for several big companies to flourish, with Siebel at the top.
NO RED FLAGS. If you believe the CRM growth story, you can still get into Siebel below its premium prices of last fall. Shares have fallen 58% from a high of $120 last November to about $51.50 today. That's up from a low of around $30 in early April, when major software vendors began issuing earnings warnings for the first quarter. Siebel got caught in the downdraft. However, it didn't put out a warning and, in fact, went on to beat Wall Street's estimates. And even now Siebel hasn't raised any red flags on earnings. So many analysts say this could be a chance to buy in before the next upward run.
So what does CRM software actually do to merit all the money attention? A number of key things. It automates some of the work of sales forces and call centers with information that's well-organized and easily accessed. It pieces together and analyzes customer data so companies can sell new services and merchandise more effectively. It can be a valuable growth tool.
For example, order clothing from J.Crew for your son in October, and you're likely to receive e-mail from the retailer before Christmas offering 20% discounts on men's clothing. That's one aspect of CRM at work. But others could include sending out the most current sales data to a mobile sales force over the Web -- Siebel's strength. "They're particularly strong if you have a large bag-carrying sales force, and you need to have visibility into the sales pipeline," says Christopher Cunningham, chief information officer of luxury Web merchant RedEnvelope.com.
That kind of success in pleasing its own picky customers has sent Siebel's revenues soaring more than 1,400% in just three years, from $118 million in 1997 to $1.8 billion in 2000. Investors have had a bracing ride, too, as share have climbed 500% from under $10 in May, 1999, to current levels.
TOUGHER THIS TIME. Still, the future climb won't be quite so easy. Just as every company wants a CRM solution, just about all the big software vendors are keen on meeting that demand. Database giant Oracle (ORCL ) is promising customers it can build them a working CRM system in 90 days. The campaign is a direct play for customers who would normally sign on with Siebel but have been surprised to find how much time and effort it can take to implement a full-blown CRM package that runs smoothly.
Another likely spoiler for Siebel is Peoplesoft (PSFT ), a leader in human-resources software that recently bought Vantive, one of the top four CRM vendors. Upstart E.piphany (EPNY ), is a new force, too. Many analysts believe it has the best CRM tools for analyzing and predicting a customer's needs.
Not to worry, say Siebel execs. "This is the fastest-growing market in the software industry," says Senior Vice-President David Schmaier. "You won't find a major company in five years that doesn't have CRM software," he predicts. Schmaier also points out that Siebel's package is best able to handle customer needs through a variety of channels, whether that's an Internet connection or a terminal at a salesperson's fingertips. And Siebel has locked in some of the bluest of blue chips as customers: Microsoft, IBM, and Sun Microsystems.
At the same time, analysts say the tech-market meltdown of the past year has given Siebel a size and staying-power advantage over small players, many of which are still working out the kinks in their offerings. W.R. Hambrecht software analyst Rich Peterson says many of the pint-size outfits will soon be struggling to stay in the game. And while Oracle and Peoplesoft remain a threat, they must overcome worries among some buyers that they're not native CRM companies, he says.
GOING SHOPPING? Indeed, Peterson believes Siebel can grow several times beyond the software industry rate, thanks to its tremendous lead in the CRM field. For 2001, he expects Siebel to earn 58 cents a share, or about $300 million on revenues of $2.3 billion, compared to net income of $123 million, or 53 cents a share last year on sales of $1.8 billion (including merger costs). Siebel also has $1.3 billion in cash, so it could be saving for an acquisition, considering stock prices of competitors are still well below one-year highs.
In early May, Hambrecht's Peterson put a share-price target of between $60 and $65 on Siebel for the quarter ending June 30. First Call consensus estimates for the second quarter are earnings of 13 cents per share, and Peterson predicts revenues of $515 million for the quarter.
With the economy still sputtering and the tech sector still faltering, don't expect any fireworks when Siebel reports second- and third-quarter earnings. "IT spending still has not improved," Wit Soundview analyst Patrick Mason wrote in a recent update on the CRM industry. "Deal closure remains tough for now." But when tech spending picks up again, the market will likely reward the industry leaders with the best growth prospects. Right now, that's a position that suits Siebel.
By David Shook
Edited by Alex Salkever