PeopleSoft's Numbers Probed for Soft Spots

PeopleSoft's third-quarter results were generally viewed as respectable by Wall Street analysts, but a closer look revealed some deteriorating numbers, according to a note Monday from accounting guru Howard Schilit's Center for Financial Research and Analysis.

In the four-page note, the Center points out that PeopleSoft's deferred revenue and cash flow from operations dropped in the third quarter, which ended in September. In addition, the company's operating income was boosted by a drop in research and development spending, especially when including PeopleSoft's controversial spinoff of Momentum Business Applications, which PeopleSoft reacquired in the second quarter. Schilit and PeopleSoft were not immediately reachable for comment.

PeopleSoft's deferred revenue in the quarter, which the company addressed on its earnings call, dropped by $40.3 million sequentially and $16.4 million year over year. Deferred revenue also declined sequentially in the third quarter a year ago, but by only $21.3 million. Among other things, a drop in deferred revenue may signal a decline in the company's future revenue or that a company is draining its revenue backlog to make numbers.

PeopleSoft has said seasonality is partially responsible for the drop, but also blamed a billing delay for the decline. If fourth-quarter deferred revenue increases more than normal, that would indicate the reason was legitimate, noted JMP Securities analyst Pat Walravens, who has an underperform rating on PeopleSoft.

Still, "PeopleSoft was not specific about what it was in their billing process that fell apart, and that causes you to be a little bit suspicious because you would think the billing process is something a software company has got down pretty well," Walravens said. His firm hasn't done any investment banking in the software sector.

PeopleSoft's cash flow from operations -- often viewed as a better barometer of a company's business than net income -- also weakened during the third quarter and in the nine months ended in September, Schilit noted. CFFO totaled $23.8 million at September 2002, vs. $73.6 million in the previous quarter and $122.5 million in the year-ago period. In the nine-month period, CFFO declined by $93.4 million year-over-year to $238.2 million, Schilit reported.