PeopleSoft Remains Rock-Hard And Economy Proof

PeopleSoft Remains Rock-Hard And Economy Proof
P.J. Jakovljevic - November 15, 2001

Event Summary

On October 18, PeopleSoft (NASDAQ: PSFT), one of the leading business applications providers, announced record income from recurring operations for the third quarter ended September 30, 2001. Income from recurring operations increased by 113% to a record of $50 million, up from $23 million in the same quarter of 2000. Total revenue increased 15% over the third quarter of last year to $509 million. Third quarter license revenue increased 15% over Q3 2000 to $152 million, but was 8% down sequentially from $166 million in 2Q 2001 (See Figure 1). Service revenue rose 21% over the same quarter of last year to $333 million.

Figure 1.

PeopleSoft's cash and investments totaled more than $1.5 billion at September 30, 2001, an increase of $113 million during the quarter. Day's sales outstanding (DSO) improved to 63 days from 68 days in the prior quarter. Including non-recurring items, third quarter 2001 net income rose sequentially to $50.3 million. The non-recurring items include a favorable adjustment to existing restructuring reserves and a charge related to the acquisition of assets of Cohera Corporation. The net impact of these non-recurring items is a charge of $0.75 million before tax or a $0.41 million after tax gain.

Although the net income in 2001 is less than in 2000, it is more organic, as in 2000 it was due to favorable adjustments. Reported net income in the third quarter of 2000 of $68.7 million included two non-recurring items: 1) a gain from the sale of equity securities and 2) product line exit costs. The net impact of these non-recurring items was a much more favorable adjustment of $84.2 million before tax or a $45.3 million after tax gain.

"PeopleSoft continues to distinguish itself by delivering strong results under these extraordinarily challenging circumstances," said President and CEO Craig Conway. "In this difficult economic environment, PeopleSoft continues to widen its lead by delivering the industry's only pure Internet enterprise applications and by focusing on business execution. We continue to experience accelerating adoption of PeopleSoft 8, our pure Internet enterprise applications, by both new and existing customers. Customers are realizing the dramatic productivity improvement, cost reductions and profit increases that these applications deliver. We also are experiencing rapid market acceptance of PeopleSoft 8 CRM. In addition, we launched PeopleSoft 8 Enterprise Service Automation (ESA), a solution that positions PeopleSoft as the leader in an exciting new market category."

PeopleSoft reportedly won significant deals against its competitors in the third quarter in all product lines and across all geographies. The average deal size reportedly increased to more than $700,000, supporting the claim of multi-product sales, which is remarkable considering that approximately 40% of PeopleSoft's quarterly revenue comes from companies with under $250 million in revenue. Also, in sharp contrast to many direct competitors, PeopleSoft, while aggressively controlling costs, including head count, has yet to mention layoffs or restructuring.

"PeopleSoft is pulling away from the competition," Conway concluded. "While our competitors are disassembling and reassembling their products to compete with PeopleSoft's pure Internet architecture, we are extending our lead with enterprise applications that are recognized as a generation ahead."

Market Impact

While we may question the CEO's disparaging statement about competitors' products, the market seems to be buying into it. The message of easy deployability and quick results with its Internet-based products and of collaboration seems to be resonating with decision makers during tough economic conditions. Moreover, PeopleSoft offers well-integrated applications for almost every business function, from managing customer relationships and global corporate finances to supply chain planning and administering human resources programs. It also exhibits a set of analytic programs that allow an enterprise to constantly monitor its overall performance. Users access these applications through Web-based portals that reflect their specific roles as an employee, customer, or supplier of the enterprise. A broad functionality footprint, product interconnectivity and support for many industry accepted open integration standards, product scalability, provision of the support for leading web platforms, and the product global capabilities all bode well for PeopleSoft's strong competitiveness.

In addition the market acceptance of PeopleSoft 8's architecture, PeopleSoft has executed well in many concurrent product initiatives including its Accelerated Solutions for the mid-market with guaranteed fixed-price deals, Enterprise Portal Solutions, Enterprise Service Automation (ESA), hosted and/or ASP offerings, etc. Even its erstwhile holy grail, HRMS and Payroll applications, have been experiencing rejuvenated acceptance, as PeopleSoft has managed to add new ROI spin to these mature technologies and make them attractive despite the slow times. Global Payroll features and HRMS amenability to efficient recruitment purposes are the examples in case.

But particularly encouraging for the company should be the success of its international expansion (with almost 40% revenues coming from abroad now compared to less than 20% two years ago) and its supply chain management (SCM) and non-complex discrete manufacturing campaign. These applications are currently among its fastest selling products. Gone are the days when other vendors were complacent and shrugged PeopleSoft off as a serious global contender in these areas.

PeopleSoft 8 has also gained traction, with more than 350 customers live, including new implementations and upgrades, and another 150 expected to go live the end of 2001. PeopleSoft CRM, which was launched only three months ago, has reportedly been a big contributor to the revenue (although the company does not provide specific numbers). With its success in cross selling applications both to existing and new customers and with well-crafted deals for the mid-market, PeopleSoft may continue its momentum.

For all these reasons PeopleSoft has posted six consecutive quarters of growth and profitability, making it the sixth largest software company in the world and a darling of financial markets, and a likely school example of great management. However, the company has to carefully watch that it does not overstretch itself and lose focus going forward.

The benefit of being a market darling bears the pressure of too harsh punishment when things start going wrong. SAP, Oracle and Siebel will also be much more alert and will bide their time to lambaste PeopleSoft, instead of letting it grow unnoticed in their back yard while they are busy bickering amongst themselves. These vendors can also tout deeper and broader functionality in some areas, e.g. trade exchanges. PeopleSoft also has to execute the assimilation of smaller software vendors, which it recently acquired in order to fill the gaps in its e-business infrastructure offering.

Further, PeopleSoft remains a complex application supporting complex enterprise processes, which can only partly be alleviated with browser-only intuitiveness. Even if PeopleSoft was that technologically advanced, it is only one of many other important considerations, and savvy users know well that the technology alone cannot resolve the intricacies of business processes.

If the implementation takes much more doing than was hinted during the pre-sales discussion with company representatives, PeopleSoft might afterwards feel the wrath of disillusioned customers. No vendor is immune either to problem-plagued upgrades when they involve a quite complex application that is interfaced to a number of legacy and/or third-party systems. There are indeed indications that user upgrades that involve PeopleSoft 7 and older releases have been taking much longer than originally anticipated. This has forced the company to extend the date of PeopleSoft 7 support discontinuation to four years from the date of the product release. The good sign, however, is that the company seem to be cognizant of its challenges too, and consequently perceptive and swiftly in addressing users' concerns.

User Recommendations

It appears the market has been buying into PeopleSoft's message and the benefits of Internet-based products. It remains to be seen whether the pure-play competitors will emulate the pure Internet architecture before PeopleSoft delivers the all-encompassing deeper e-procurement, private trade exchanges (PTX), CRM and SCM functionality. If one considers all aspects of e-Business evaluation, PeopleSoft has earned the license to be evaluated along with global market leaders. The depth, breadth and innovativeness of PeopleSoft's offerings for many industries are attractive at first sight and deserve due attention bearing in mind the risks associated with the recent release of the product.

In general, global enterprises within PeopleSoft's stronghold (e.g., human resources and non-manufacturing, service industries) should evaluate PeopleSoft as a matter of course. The PeopleSoft 8 value proposition also comes for enterprises that are XML-compliant and/or have data scattered over several different systems/platforms, and the need to integrate those into a single solution. Furthermore, non-complex discrete manufacturing enterprises within PeopleSoft's industries of focus and with extensive distribution needs may benefit from evaluating the PeopleSoft SCM solution.

More comprehensive recommendations for both current and potential PeopleSoft users can be found in PeopleSoft - Catching Its Second Wind From The Internet; Part 3: Predictions and Recommendations.

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