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Siebel expands hosted business despite shortfall

While Siebel's performance continues to disappoint investors, there are signs its hosted applications business is growing.

Despite reporting that its second-quarter revenue would fall well short of Wall Street estimates, Siebel Systems' growth of its hosted applications business could signal improving prospects for the company.

When freshly appointed Siebel Chief Executive George Shaheen first spoke to the customer relationship management (CRM) software maker's customers in April, he openly admitted that the company "took its eye off the ball" in letting rivals such as Salesforce.com steal away clients with hosted applications services. At that event, and several times since, Shaheen has labeled Siebel's own hosted offering as one of its best chances for luring back customers and growing the company's software revenue.

"The competition will only increase as larger on-premise software players move further into on-demand, and right now only Siebel and Salesforce are competing in those larger on-demand deals."
--Liz Herbert, analyst, Forrester Research

Late Thursday, Siebel announced that it is expecting to report second-quarter revenues of $312 million to $314 million, which fail to meet Wall Street analysts' projections of $318.5 million in sales for the timeframe, according to Reuters Estimates. However, mixed in the disappointing numbers was one figure that could serve as a shot in the arm for Siebel: The company said its hosted applications business nearly doubled over its first-quarter results.

Comparatively speaking, sales of Siebel CRM OnDemand, which the company said will total almost $20 million for the second quarter, represent only a fraction of the business done by Salesforce, which had more than $58 million in sales for its first quarter of fiscal 2006, which ended April 30. Yet, industry watchers conceded that Siebel's rapid growth could serve as a beacon of hope at the company and said that the news undeniably indicates that competition in the hosted arena is heating up.

Hosted tools, also known as on-demand applications, consist of software programs maintained away from an organization's physical premises by a vendor who oversees management of the applications as well as any data used in the tools. Proponents argue that the "software as services" offer a number of advantages over traditional enterprise software, such as faster installation, lower overall costs and increased ease of use.

In addition, hosted applications companies such as Salesforce offer their customers the option of paying for a subscription to their tools for a monthly fee not unlike rent, rather than pay upfront for software licenses that usually stretch for several years.

According to researchers IDC, the overall on-demand software market is expected to grow to $4.8 billion in the United States alone by 2009, driven by a 28 percent annual compound growth rate.

Liz Herbert, an analyst with Cambridge, Mass.-based Forrester Research, said that Siebel and Salesforce are already competing more frequently for the same deals, in particular as larger customers are embracing the hosted software model. An increased focus on hosted applications from vendors such as Siebel, SAP and others is also driving greater interest in the tools, she said.

"The competition will only increase as larger on-premise software players move further into on-demand, and right now only Siebel and Salesforce are competing in those larger on-demand deals," Herbert said. "Siebel has definitely made headway with its product, and they're learning what the needs are in that market and how to sell into it."

Herbert said that Siebel's numbers are impressive but that any reflection on the hosted sales figures should acknowledge that the entire market for hosted applications is growing rapidly. The analyst said that Forrester has tracked an industrywide trend of customers "shying away" from larger on-premise, multimillion-dollar license deals, and said many companies are instead opting for the lower risk presented by hosted offerings.

Scott Nelson, an analyst with Gartner in Stamford, Conn., said he expects that demand for all forms of enterprise software will fail to meet projections at a number of companies in the near future, as customers are not buying the tools as aggressively as they were even six months ago. With that in mind, he said, Siebel's on-demand performance should be seen as a real positive.

"I don't see on-demand as the salvation of the company, but they need it as one of the supporting pillars to have a strong sales pipeline, and it shows that they are going to play in that space and contest Salesforce.com," Nelson said. "Siebel is putting a lot of resources into on-demand, and keeping up with the market. That shows that they're definitely becoming more competitive in that space."

Nelson said that the two companies will compete specifically for deals in the upper-midmarket arena, where Siebel is hoping to lure customers smaller than its typical on-premise clients and where Salesforce is trying to sell into increasingly larger organizations.

Other market watchers cautioned that Siebel's on-demand growth figures should be taken with a grain of salt, as the company had limited prospects in the space only a year ago. Rob Bois, analyst with Boston-based AMR Research, said that Siebel shouldn't be celebrating yet, but he believes that the company's product and chances of competing have vastly improved.

"Part of Siebel's growth is due to the fact that they were later to the game with hosted compared to some of the other vendors--Salesforce in particular--so they're on the leading edge of a growth curve and starting from a smaller base," Bois said. "But Siebel CRM OnDemand is now very competitive with Salesforce in terms of ease of use, and Salesforce is working to add the sort of customization and integration capabilities that we've traditionally seen in on-premise software."

From Bois' perspective, Siebel's next big step in enhancing its stature in the hosted market would be to announce a sizable customer account, something in the same range as the 10,000-seat deal Salesforce.com is rumored to have landed with Cisco Systems.

Siebel representatives said the company wouldn't comment further on its hosted applications sales growth until after it has officially reported second-quarter earnings.

Reached via e-mail, Salesforce Chief Executive Marc Benioff denied that his company is facing increased competition from its oldest rival. Benioff has repeatedly used the failure of installations of Siebel's on-premise software as a marketing tool for his own company, and said that the software maker's on-demand figures are misleading.

"We now have 267,000 paying subscribers to their less than 40,000. That is the score of the football game, and their results speak for themselves," Benioff said. "Siebel is doing much worse than anyone has expected, and Siebel's on-demand business is a failure."