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.