Research Associate: Deepa Agarwal, M. Sc

January 6, 2006

Research Associate: Deepa Agarwal, M. Sc.

Editor: Christopher R. Jones, CFA

Sr. Ed.: Ian Madsen, CFA: ; 1-800-767-3771 x417

155 North Wacker Drive  Chicago, IL 60606

Siebel Systems, Inc. (SEBL - Q)

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$10.60

Note: All new or revised materials since last report are highlighted.

Reason for Report: Non Earnings Update (Previous Report – 3Q05 Results, Nov, 8)

Overview

Headquartered in San Mateo, California, Siebel Systems, Inc. (SEBL) is a leading provider of Customer Relationship Management (CRM) applications software that helps to automate and enhance sales, marketing, and customer service. Siebel CRM solutions can be installed on premise (eBusiness Application suite), hosted online (CRM OnDemand) or deployed in any combination. Available in more than 20 industry-specific versions, SEBL solutions embed industry CRM best practices for sales, marketing, and customer service that helps automate and enhance business processes between a company and its customers, partners, and employees. SEBL, through internal development and acquisitions, has amassed the most comprehensive solution set in the market and has sold its solutions to over 4,000 customers. It partners with many software providers such as IBM and Microsoft but also faces competition from others like SAP, Oracle, and Salesforce.com. On September 12, 2005 Oracle Corporation (ORCL – Q) made a cash takeover offer for all outstanding shares of SEBL at $10.66 per share and is expected to close early in 2006. For more information, please visit

On October 26, 2005 SEBL reported 3Q05 results in-line with earlier, pre-announced results. SEBL posted a strong quarter with upside from strong license sales likely related to pre-merger deal closings and specifically, strength in analytics. SEBL reported GAAP net income of $34.7 million, which equates to a diluted GAAP EPS of $0.06 - diluted pro forma EPS was $0.09.

Key Positive Arguments / Key Negative Arguments

• In the wake of 1Q05 earnings disappointment, SEBL has begun a cost-cutting program to quickly ‘right-size’ operations and improve margins. Target is 15% operating margin and $300 million operating expenses per quarter in 2006.
• “Nexus” component workbench launch planned for this summer will greatly assist customers and ASPs with tool to customize SEBL applications and access $20 billion custom application market.
• OnDemand business shows strong growth with 40k subscribers. The company continues to tackle competition from Salesforce.com quite well.

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• Sales execution continues to hamper the company’s progress – enterprise cycles are long, complex, and the ‘big deal’ dependency drives inconsistent order closing.
• Competition from both high-end ERP (like SAP, and MSFT) and other business intelligence providers (HYSL, COGS, and ACTU) as well from low-end providers like CRM (i.e. Salesforce.com).
• Poor publicity for CRM and Siebel and ongoing SEC scrutiny on Regulation FD could affect the company image.
• The sales pipeline of SEBL may be hampered if salespeople are motivated to close as many deals as possible before the merger closes.
• Stock may be negatively affected if the SEBL- ORCL transaction fails to close.

Note: SEBL’s Fiscal Year ends on December 31.

Sales

Total revenue in 3Q05 was $348 million – up 9.7% over the same period last year and was well above the company’s recently revised guidance of $305 - $315 million. License revenue was $112 million, Maintenance revenue was $111 million, while Services and Other revenue was $124.5 million. The estimated consensus average for 2005 sales is $1,323.1 million and $1,368.9 million for 2006.

License revenue, 32% of total revenue, was up 7% Y/Y but down 43% sequentially. New customers accounted for 40% of licenses, compared to 34% in the prior quarter. Core CRM products generated $69 million of license revenue, down from $54 million last quarter and $69 million Y/Y.

Analytics licenses of $30 million were up 10% Y/Y and 68% sequentially. These accounted for 27% of licenses, compared to 23% in the prior quarter. While analytics represents a fertile area of growth within

Enterprise software, the company’s long-term growth prospects in this segment may be inhibited by competition from the pure-play business intelligence vendors. Data integration licenses of $13 million increased 58% Y/Y and 99% sequentially. From a pure market-opportunity perspective, data integration is a defensive segment against the larger suite players and not necessarily a growth vehicle or a segment with competitive advantage for future.

CRM OnDemand, SEBL’s hosted CRM solution, signed contracts totaling $11.3 million, which represents over 49%Y/Y growth but a sequential decline of 44%. SEBL signed 5,000 paying subscribers, down from 6,000 subs in Q2, and increased the cumulative base by 12% to 44,300. SEBL COD contract bookings declined 44% Q/Q to $11.3M. SEBL remains committed to become the dominant hosted CRM vendor on the back of the company’s vast CRM experience (3.4 million total users) and strong cash position.

The Americas accounted for 53% of licenses compared to 56% in the prior quarter. EMEA license contribution increased to 30% from 28% in the prior quarter. APAC license contribution improved to 18% from 16% in the prior quarter.

The company's top three verticals in the quarter were communications, manufacturing, financial services, and life sciences, which contributed 23%, 21%, 20%, and 16%, respectively, to licenses.

The company closed 32 deals greater than $1 million and one deal greater than $5 million compared to 15 and 1, respectively, in the last quarter, and 32 and 2 in last year’s third quarter.

Please refer to Zacks Research Digest spreadsheet for detailed sales breakdowns and future estimates.

Margins

The operating margin was 14.5% in 3Q05, up 4.5% Y/Y and 13.6% sequentially mainly due to strong upside in license revenue, mix shift, and cost cutting measures. Net margin was 13.9%, up 5.9% Y/Y and 13.7% sequentially.

The company is in the middle of a wide restructuring program, where it has incurred $8.5 million in restructuring cost this quarter to achieve its below $300 million per quarter cost base. The company reduced head count, reduced general and administrative expense by $3 million sequentially, and reduced research and development expense $9 million sequentially as part of its cost cutting initiatives.

At the end of 2004, management was hopeful that it would achieve 15% operating margin in 4Q05 (despite guidance of 13-14% pro forma operating margin) and it was revealed that restricted stock grants to management would vest 3 years earlier than normal if they were successful. However, to achieve the desired margin, revenue is required to pick up slightly more than $350 million a quarter.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Earnings per Share

SEBL reported GAAP net income of $34.7 million, which equates to a diluted GAAP EPS of $0.06 in 3Q05.However, excluding the impact of $8.5 million restructuring charges and $5.9 million in charges related to the UpShot acquisition earn out and the pending Oracle transaction, pro forma net income was $48.5 million and diluted pro forma EPS was $0.09.

Zacks Consensus EPS model estimates an average of $0.16 for 2005 and $0.23 for 2006.

The Zacks Digest average EPS is $0.17 for 2005 and $0.24 for 2006.

2005 forecasts (26 of them in total) range from $0.22 to $0.16; average is $0.19.

2006 forecasts (26 of them in total) range from $0.31 to $0.17; average is $0.24.

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures

Company Guidance

For 4Q05, the company expects a total revenue of $340 - $360 million. License revenue is expected at $110 - $130 million, Maintenance revenue around $120 - $126 million, and Services and others of $110 - $115 million. Pro forma operating margin is expected to be within 13% to 16% and pro forma EPS of $0.07 to $0.08.

The company remains committed to achieve 15% operating margin and recuced operating expense of $300 million per quarter or below. It also expects to lower head count sequentially through 3Q05 and 4Q05, in order to lower run-rate costs to achieve this target.

Target Price/Valuation

The Digest average target price is $10.26↓.

Target price for SEBL varies from $9.00 to $10.66. The consensus average price target quoted by 9 analysts is $10.26 a share. The analysts have adjusted their price target to align them with ORCL’s bid of $10.66 per share of SEBL’s stock. The shares no longer trade on fundamentals, which has led one analyst (Merrill) to withdraw their target price. Another analyst (Goldman) holds an advisory position in this deal and has thus withdrawn their target price and rating.

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Recent News

On October 18, 2005, SEBL, a leading provider of customer-facing solutions, announced the launch of the Siebel Online Community. This new forum enables Siebel to discuss with its base of more than 4,000 customers to discuss processes and technologies and helps to make its customer-facing systems and business initiatives successful.

On October 17, 2005, SEBL executives introduced Siebel Customer Adaptive Solutions, the company’s vision for the next generation of customer relationship management (CRM). Siebel Customer Adaptive Solutions is a comprehensive strategy, including a complementary Customer Adaptive Architecture, which encompasses all Siebel products and service offerings, and enables organizations to better understand and adapt to the needs of their customers in response to rapidly changing business requirements.

On October 17, 2005, SEBL announced the general availability of Siebel Business Analytics 7.8, a major new release of its market-leading analytic applications and next generation BI platform products.

On October 3, 2005, SEBL, a leading provider of customer-facing solutions, announced the availability of Siebel CRM Professional Edition 7.8. The newest release of Siebel's on premise offerings for small and medium-sized businesses (SMBs) delivers customer relationship management (CRM) capabilities specifically designed to support the unique business requirements of SMBs.

On September 20, 2005, SEBL announced that Asset Media has selected Siebel CRM OnDemand to drive new marketing initiatives and provide a strategic advantage by incubating new opportunities in the Spanish media market. On the same day Teradata, a division of NCR Corporation (NCR: NYSE), and Siebel Systems, Inc., announced the availability of a complete suite of Siebel Business Analytics applications optimized for Teradata Warehouse.

On September 19, 2005 - Haley Systems, Inc., the technology leader in business rules management systems, and SEBL announced that Haley will provide the core business rules technology for Siebel Systems’ next-generation product offerings.

On September 12, 2005 Oracle Corporation (ORCL – Q) made a cash takeover offer for all outstanding

shares of SEBL at $10.66 per share. The offer is valued at approximately $5.85 billion, or $3.61 billion

net of Siebel's cash on hand of $2.24 billion. The offer is subject to standard regulatory and

shareholder approval but is anticipated to close early in 2006.

Capital Structure/Solvency/Cash Flow/Governance/Other

Siebel reported $18 million in cash flow in 3Q05, including a $13 million cash dividend paid in July. The company will not pay an additional dividend before it becomes a part of Oracle. Total cash at quarter end was $2.247 billion or $0.41 per share, reflecting a continued strong balance sheet and improved day’s sales outstanding.

SEBL remains one of the most prolific issuers of options to management and directors in the software sector with 133 million o/s as of March 31, 2005 – 74 million of which are ‘in the money’ and nearly 55 million are currently exercisable. Although not required to adopt FASB123r (that mandates expensing of stock-based compensation) until FY06, the 10K issued on March 15 revealed that the impact in FY05 would be $35 million per quarter or about $0.26 per diluted share in the full year.

SEBL has accepted ORCL’s merger proposal of $10.66 per share. The offer is valued at approximately $5.85 billion or $3.61 billion net of Siebel's cash on hand of $2.24 billion. The Board of Directors of Siebel Systems has voted in favor of the transaction, and Tom Siebel (Chairman of the Board and owner of 7% of common shares) has agreed to vote his shares in favor of the acquisition. Siebel stockholders will convene in a special meeting to vote on the acquisition. Oracle stockholder approval is not required. While the transaction and the timing are subject to regulatory approvals, the deal is expected to close in early 2006.

Siebel shareholders will receive $10.66 per share in cash for each Siebel share held, unless they elect to receive Oracle common stock, but no more than 30% of Siebel's common shares may be exchanged for Oracle common stock. In the event that Siebel shareholders holding more than 30% of Siebel common stock elect to receive Oracle common stock, the equity consideration will be prorated. Oracle common shares were trading at $13.38 immediately prior this announcement.

The measurement period for Oracle's average share price will be the 10 trading days ending the day prior to close, and Oracle will have the right to choose an election date during the 20 trading days ending two days prior to close. If Oracle's average share price is at or above $10.72 prior to close, Siebel shareholders who elect to receive stock will receive $10.66 per share of value in Oracle common stock for each share of Siebel common stock held. If Oracle's average share price prior to close is less than $10.72 per share, Siebel shareholders who elect to receive stock will receive 0.994 shares of Oracle common stock for each share of Siebel common stock held, which would result in a value of less than $10.66 per share. Oracle intends to repurchase an amount of shares equal to the number of shares issued in the transaction.

Long-Term Growth

The long-term growth rate ranges from 3% (AG Edwards) to 20% (Smith Barney), with the Digest average of 10.8%.

For future revenue growth, the company is focused on several new applications including analytics, application integration, on demand solutions, and a new branch teller application (acquired from Eontec). With the recent eDocs Inc. acquisition, Siebel expands into e-billing and customer self-service. The company has also renewed its focus on the under penetrated SMB market.

Factors that could drive the stock in the long term include the success of new growth initiatives including OnDemand, Universal Application Network, Employee Relationship Management, and Homeland Security, better-than-expected traction from the company’s web-based CRM offering, and a high degree of disruption caused by the currently proposed acquisitions in the software industry, which could lead to an increase in competitive wins for Siebel.

Growth can be achieved by focusing on new market opportunities and improved execution. SEBL intends to pursue further business analytics and hosted CRM markets and invested in the custom CRM and customer facing solutions markets.

Individual Analyst Opinions

POSITIVE RATINGS

None

NEUTRAL RATINGS

AG Edwards – Hold (No price target): 10/27/2005. The analyst believes that it is too early to conclude whether SEBL’s strong 3Q05 results have any positive or negative implications for Oracle. They would like to reserve their opinion until the next quarter’s results that would show whether Oracle would buy a business that is stronger than expected or one that faces depleted business prospects due to pipeline drainage before the acquisition is complete.

EKN – Market perform ($10.66 target price): 10/27/2005. Despite Siebel’s relative strong performance in the third quarter, the analyst believes Siebel faces an increased competitive market and could continue to lose market share to ERP (enterprise resource planning) vendors such as SAP and Oracle, which may offer easier integration with their extensive product suite, and to smaller specialized vendors such as Salesforce.com. Hence, the analyst believes Siebel’s fundamentals could continue to decline.

First Albany – Neutral (No target price): 10/27/2005. The analyst maintains a Neutral rating on the company based on ongoing sales force restructuring and management’s indication of successfully closing a few public sector deals that slipped out last quarter.

SIG – Neutral (No target price): 10/27/2005.The analyst believes that it is reasonable to assume that many customers may buy licenses from and renew maintenance contracts with Siebel, as Oracle’s maintenance rates are quite higher than Siebel’s.

Bernstein – Market perform ($9.50 target price): 10/27/2005. The analyst is worried about SEBL’s ability to maintain market share when considerable operating investments are required in coming years to address the changing needs of the software market.

Buckingham – Neutral (No target price): 10/27/2005. Although regulators have asked for additional documents from Siebel and Oracle to review the acquisition, the analyst believes that it will close in early 2006, given the significant competition that exists in the CRM market.

FTN Midwest Res. – Neutral (No target price): 10/27/2005. The analyst maintains a Neutral rating on SEBL as they do not see any catalyst for the stock in the mid-to-long term and believes the shares are fairly priced at current levels.

Jefferies – Hold ($10.66 target price): 10/27/2005. The analyst believes that the Department of Justice will not challenge the Oracle transaction, despite issuing a request for more information on October 24th.

J.P. Morgan – Neutral (No target price): 10/26/2005.The analyst believes that SEBL’s Q4 guidance is conservative. They also feel that SEBL might face transitional issues before the acquisition.

RBC Cap. – Sector perform ($10.00 target price): 10/27/2005. Considering SEBL’s cash balance, the transaction seems strong from ORCL’s point of view. The shareholders would also agree to this move given the competition pressure and internal problems faced by SEBL. Though ORCL has plenty of work ahead, the integration challenges with SEBL will pale in comparison with the PeopleSoft acquisition.