PeopleSoft warned against complacency

PeopleSoft beat Wall Street's expectations for its first fiscal quarter despite a nine per cent drop in licence revenues.

The applications supplier fared much better than rival SAP, which posted a dramatic fall in quarterly profit last week. For its first quarter to 31 March, the vendor saw profits collapse by 43 per cent to 56m euros, on revenue up 10 per cent compared with last year.

But while Craig Conway, PeopleSoft's chief executive, crowed over the figures, analysts believe that it is still early days in a year that has a long way to go.

For the quarter that ended 31 March, the company saw sales from recurring operations grow by a modest seven per cent to $375.4m, on net income that rose 39 per cent to $11m, or four cents a share. This was two cents a share higher than the First Call analysts' consensus estimate.

The 2000 and 1999 figures include the results of Vantive, which PeopleSoft acquired in the fourth quarter of 1999.

But its first quarter 2000 results from recurring operations do not include pre-tax gains of $9.5m from the sale of equity investments, $4.4m in restructuring costs, or one time pre-tax charges of $176.4m related to the company's spin-off of its Momentum Business Applications unit.

In terms of total revenues, PeopleSoft's services business received a $23m boost from sales into the Momentum company, growing 55.3 per cent during the quarter.

But its total licence sales were down almost nine per cent to $90.2m from $98.7m in the same quarter last year, although European sales increased by 45.5 per cent. This implies that North American licence revenue is as equally under pressure as SAP's.

Dave Caruso, vice president of ebusiness applications at AMR Research, said: "A smile and friendly service will only get you so far. If PeopleSoft can't execute, it won't have anyone to smile at for long."

But Steve Hill, PeopleSoft's chief financial officer, said that the supplier's revenue from its traditional human resources applications grew 10 per cent sequentially, growth that he described as "strong".

Sales of its supply chain management (SCM) packages grew 44 per cent over the same period last year, but the company's definition of this sector has been expanded lately to cover its newly introduced Professional Services Automation offerings. These enable enterprises to allocate project resources and are part of a services based sell.

A change of direction
Conway also hinted that SCM functionality will form a key part of PeopleSoft's forthcoming internet-related offerings, which should appeal to manufacturing companies. Such a move would represent a significant change for a company that has traditionally been stronger in service than manufacturing industries.

PeopleSoft also suggested that Red Pepper's demand planning package, which it acquired at the end of 1997, is now starting to contribute to revenues. Analysts claim the company has already spent $500m in related acquisition and development costs.

AMR's Caruso, said: "It should be successful in new industries like consumer packaged goods with its supply chain and logistics functionality derived from the Red Pepper purchase."

On the upside, it would appear that PeopleSoft's stable of acquired technology in both the SCM and customer relationship management sectors are solid, and its technical investments in developing a strong internet architecture will provide it with a firm sales foundation for the future.

But the key to success will be whether the company can generate high-margin licence sales and succeed in positioning itself as a vendor that offers integrated best-in-class products.

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