PeopleSoft – Again A Force To Be Reckoned With?

Event Summary

During its users conference, Connect, which took place in Los Angeles on October 22-26, PeopleSoft Inc. (NASDAQ: PSFT), a leading business applications provider, unveiled a slew of new products in its bid to maintain its current turnaround momentum. Among them were a new product for online financial settlements between companies doing business over the Internet, called PeopleSoft MarketPay, and an expansion of PeopleSoft MarketPlace exchange technology to help manage human resources, including benefits, staffing, and travel, beside traditionally handling Maintenance, Repair, and Operations (MRO) goods procurement. The company also unveiled new functionality of PeopleSoft 8 CRM product and a faster deployment option for its supply chain management applications, called PeopleSoft Supply Chain in a Box. Last but not least, PeopleSoft and IBM announced they would provide Internet-based HRMS and consulting services for companies of all sizes.

On October 17, PeopleSoft announced its financial results for the quarter ended September 30, 2000. Revenues and net income from recurring operations for Q3 2000 were $443.1 million and $23.4 million, respectively. This compares with revenues and net income from recurring operations of $346.1 million and $0.5 million, respectively, for Q3 1999. Net income for the quarter including non-recurring items was $68.7 million, or $0.23 per share. Non-recurring items include gains from the sale of equity securities of $120.1 and product exit costs of $35.9 million.

Revenues from software license fees for Q3 2000 increased to $131.5 million, a 100% increase from the same quarter last year (See Figure 1). In fact, all product lines recorded significant increases compared with the same quarter last year. Financial and Human Resource Management applications were up 120%, Supply Chain Management applications up 68%, whereas Customer Relationship Management (CRM) applications were up 57%. eBusiness Analytic applications were up 599%. License revenues increased in all major geographic regions, with the United States growing 86% and International growing 127%.

Figure 1.

Expenses were $417.4 million, compared with $346.7 million in the same quarter last year. The increases were primarily in sales and marketing, product development and cost of development services. Sales and marketing expenses increased as the company invested in additional sales personnel and marketing campaigns to drive PeopleSoft 8 into the marketplace. Development costs increased due to the costs associated with the September availability of PeopleSoft 8.

"PeopleSoft's record third quarter is a culmination of continued solid business management and execution in an industry rapidly adopting Internet technology," said PeopleSoft President and Chief Executive Officer Craig Conway. "This is the year in which the Internet evolved from a consumer vehicle to a business tool embraced by real companies. PeopleSoft is in the market to provide the infrastructure for companies to build a collaborative network between their customers, suppliers and employees via the Internet. PeopleSoft 8, the result of more than two years and $500 million of development, is the only pure Internet suite of enterprise applications to do just that. PeopleSoft 8 represents the beginning of a new chapter for PeopleSoft and our customers."

Market Impact

PeopleSoft has turned the corner and put its bleak 1999 results far behind in the past. Besides returning to strong profits and revenue growth, management should also be pleased with the following facts:

1. It has tremendously improved its traditionally low international market penetration, with the international license revenue growing 127% year over year. Given also the facts that the license revenue in the US rose 86% and that 42% of license revenue in Q3 2000 came from new customers, PeopleSoft appears to be gaining ground at the expense of its direct competitors, particularly SAP.
   
   
2. It seems as though the company has finally started reaping benefits from acquiring Vantive in 1999 and Red Pepper in 1996, and is delivering its CRM and SCM products, respectively. It is somewhat unexpected, though, that its traditional breadwinning HR product line performed better than supposedly more attractive, hot-items CRM and SCM applications.
   
   
3. These impressive results coincide with the winding down of PeopleSoft's ambitious and over two years long R&D endeavors. The market should expect much a stronger bottom-line in the future if the company continues to succeed in attracting new deals.

However, to put things in the right perspective, one should bear in mind that PeopleSoft had a dismal Q3 1999, possibly the worst in its history. Therefore, one should not be too overly impressed with the magnitude of quarterly comparative improvements. Nevertheless, the figures show the company is gaining turnaround momentum and is going in the right direction.

We believe that PeopleSoft may also be in a good position to be a strong contender in a number of industries. While this may not be the case in complex manufacturing, the company certainly can compete in traditional service industries with its HR, financial, and recently added CRM and e-business modules. While PeopleSoft has so far poorly exploited its purchase of Red Pepper, its new tack of addressing manufacturers' needs may result in far greater success.

Namely, PeopleSoft has focused its manufacturing solutions on only the following five industries: Consumer Packaged Goods (CPG), High-Tech, Wholesale-Distribution, Utilities, and Communications. It already has a strong customer base within these industries, primarily with its financial and human resource management systems, but also to a degree with its manufacturing and supply chain modules. Its evolving supply chain planning (SCP) suite will focus on the critical planning needs and capabilities needed in these industries, and will offer tight integration to PeopleSoft ERP applications and a flexible B2B integration from suppliers to end customers.

While it is still very likely that best-of-breed SCP players like i2 and Logility provide more robust functionality, there may be enough baseline functionality to vouch for considering PeopleSoft's value proposition. We believe the company will become more aggressive both on the acquisition and joint ventures fronts in order to provide a strong solution for process manufacturing.

The company's biggest challenge, without doubt, lies in creating marketing awareness, promoting its new image, products, and the Internet architecture as well as in crisp sales execution. While PeopleSoft has more than tripled its marketing budgets and is on the quest to beef up and focus its sales organization, we believe that betting mainly on enterprise performance management (EPM) analytics and new Internet-based product architecture, on top of its traditional product offering, would not suffice in the long run. For that reason, we endorse the above-mentioned new product announcements, particularly PeopleSoft MarketPay and PeopleSoft MarketPlace. By delivering these products, the company has extended its HR and financial systems expertise and taken a lead over its direct competitors, which are currently only at early planning stages of developing these capabilities. Handling payments and HR requirements are the next hot issues in the digital marketplaces frenzy, given the fact that ways of trading goods via Internet have mainly been resolved.

Therefore, PeopleSoft should focus on delivering its products on time, adhering to stringent training of its sales and customer support forces, and on preempting any dissatisfaction on the part of early adopters, with its inevitable subsequent bad publicity.

User Recommendations

Only time will tell how the prospective and existing users will take the new PeopleSoft's message. More important will be how well Peoplesoft's sales and service force can demonstrate the benefits of pure Internet architecture-based products to the prospect or customer.

Due diligence should always be paid to satisfying your unique requirements as derived from your unique e-business strategy. While selecting a strategic software partner is a challenging and risky undertaking, the positive news is there are more companies competing for your dollars. Nonetheless, the depth, breadth and innovativeness of PeopleSoft's offerings are attractive at first sight and deserve due attention.

More comprehensive recommendations for both current and potential SAP users can be found in PeopleSoft 8 Launched - Anything to Write Home About?