PeopleSoft's Buying Momentum Goes On. Pageant Participants, Line Up Please! Part 1: Market Impact

Event Summary

At the beginning of February, PeopleSoft, Inc. (NASDAQ: PSFT), one of the largest enterprise applications providers indicated its continued interest in rounding out its product portfolio through favorably priced acquisitions. According to the Financial Times, Craig Conway, PeopleSoft's CEO, somewhat enigmatically said there were a number of well priced firms out in the market today that he and his associates continue to eyeball.'

The news follows the January 25 announcement that the company would exercise its option to purchase 100% of the outstanding Class A Common Stock of Momentum Business Applications, Inc. (NASDAQ: MMTM). With this purchase, PeopleSoft will own the intellectual property in the products developed by Momentum and thus will no longer have any obligation to pay a royalty to Momentum on those products. The purchase option was granted to PeopleSoft in the Certificate of Incorporation of Momentum Business Applications, Inc. at the time the company was established. Under the terms of the purchase option, the total cash purchase price is expected to be approximately $90 million.

This is Part One of a two-part event note discussing recent announcements by PeopleSoft and their impact on the market and users.

Other PeopleSoft Initiatives

In addition to its acquisition moves, the company has also recently made other attention capturing initiatives. On January 29, PeopleSoft announced the global expansion of PeopleSoft eCenter, its application hosting solution. Building on its success in North America, PeopleSoft plans to expand eCenter's business globally, providing organizations worldwide with the same benefits realized by current eCenter customers. These benefits include single-vendor accountability, rapid deployment, and unique application expertise. To that end, PeopleSoft selected Hewlett-Packard Company to provide the technical operations, infrastructure and services needed to extend PeopleSoft eCenter globally. PeopleSoft chose HP for its established global infrastructure and reputation for commitment to customer service. HP Services will manage the people, process, and technology for the PeopleSoft eCenter technical operations. In addition, PeopleSoft eCenter customers will benefit from a comprehensive range of HP Services' offerings, including desktop and network management, data security, high-level disaster recovery, and enterprise integration services.

On January 28, PeopleSoft announced that all three of its North American Consulting Upgrade Labs have received ISO 9001:2000 certification. This certification may demonstrate that PeopleSoft Consulting has established a superior quality management system throughout its North American lab operations. The International Organization for Standardization (ISO) is the global standards body that created ISO 9001:2000, a Quality Management System standard intended to increase confidence in product quality and facilitate trade across international boundaries. ISO 9001:2000 requirements state that an organization must strive for customer satisfaction and the continual improvement of its products and services.

This certification should assure customers that PeopleSoft has processes in place to meet and exceed expectations of quality. PeopleSoft operates Upgrade Labs in Toronto, Atlanta, and Chicago. The focused lab environment should enable customers to leverage the deep technical and functional expertise of certified PeopleSoft consultants for software upgrades, while reducing costs and project timelines.


The above announcements came on the heels of the January 24 announcement of upbeat fourth quarter and full year 2001 results. For the fourth quarter ended December 31, 2001, software license revenue rose to a record $174 million, up 15% from $151.8 million in the previous quarter but only 6% from $164.5 million in 4Q 2000 (see Figure 1 below). Likewise, total Q4 2001 revenue increased modestly 6% to $528 million compared to $497.8 million a year ago and only 4% compared to $509.3 million in Q3 2001. Income from recurring operations, however, increased by 40% to a record $58 million, up from $41 million in the same quarter of 2000.

Also, for the full year of 2001, software license revenue increased 30% to $645 million, and total revenue increased by 19% to a record $2.07 billion. Income from recurring operations increased a whopping 107% to a record $190 million, up from $92 million, in 2000 (see Figure 2 below). The Company's cash and investments rose to $1.67 billion at December 31, 2001, an increase of $158 million during Q4 2002, and an increase of $577 million during the full year 2001. Days of sales outstanding (DSO) at the end of 2001 were 64 days, an improvement from 83 days at the end of 2000.

PeopleSoft again cited significant deals against its competitors in the fourth quarter in all product lines and across all geographies. The company alleged that about 42% of revenue came from 117 new customers, up from 103 in previous quarter. PeopleSoft has also reportedly won 41 contracts in Q4 2001 worth $1 million or more, from new and existing customers. This compares to 27 similar deals in Q3 2001, and may indicate that multi-modules deals are on the rise. According to the company, almost every customer that upgrades to PeopleSoft 8.0 approximately 2,200 customers are live or in the process of upgrading total (whereby 700 customers are live) decides to buy a new application module.

Market Impact

Despite a slight recent slowdown, the year 2001 was an exceptional year of financial performance for PeopleSoft, including record total revenue, record profit, and more than $500 million of generated cash. The 19% growth was far and away better than the estimated dismal applications market growth (if not a decline) in 2001. Add possibly the purest Internet-based product architecture perception and improved international market penetration and brand recognition, and one should conclude that 2001 was a year during which PeopleSoft has fortified the notion of a formidable applications competitor.

These impressive results coincide with the introduction of attractive new product lines, including PeopleSoft 8 CRM and PeopleSoft Enterprise Service Automation (ESA). With a snazzy user interface (UI) keeping with PeopleSoft's long tradition of having one of the most compelling UIs, a completely redesigned Internet product architecture, and expanded functionality footprint, PeopleSoft is poised to take a leading position in the next generation of enterprise systems.

On scope, the product portfolio covers e-business, performance management and business analytics (e.g., customer profitability, workforce analytics, supply chain analytics, and balanced scorecard), supply chain management (SCM), human resource management system (HRMS), financials and customer relationship management (CRM). The product is portal based and requires only a browser, it is scaleable, multi-lingual (on Unicode), with embedded security, and founded on open technology (e.g., XML, SOAP, UDDI, Java, etc), with PeopleSoft's recent endorsement of Web services.

The company has successfully addressed marketing and selling to both large and smaller enterprises (see PeopleSoft Supply Chain Is Music To Mid Market Ears). PeopleSoft sells directly into accounts above $500 million revenue, and partners with consultancy and technology partners (e.g., KPMG, PricewaterhouseCoopers (PWC), Compaq, HP, IBM, Microsoft and Sun) in the mid market.

Also, the above hosting deal with HP should bode well the company's quest to penetrate the Global 2000, with the potential flexibility, scalability and global reach of the eCenter offering. It may particularly be appealing to customers with the need to integrate with non-PeopleSoft and/or legacy applications in place. Moreover, the above ISO 9001 certification should alleviate the product upgrade anxiety that some customers might have voiced earlier in 2001 (see PeopleSoft Keeps Truckin' On A Potholed Road Ahead). Also, its acquisition of Momentum seems to be at the right moment, as the $90 million cash transaction should not have a significant effect on 2002 revenue. However, it does remove any unneeded perception that creative', Enron-like accounting is being used to hide development costs.

This concludes Part One of a two-part event note. Part Two will discuss the Challenges PeopleSoft faces and make User Recommendations.

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