PeopleSoft's Pro Forma Cost-Cutting

PeopleSoft's(PSFT - Cramer's Take - Stockpickr) surprisingly robust third-quarter results may not be as clear-cut as they first appeared, one analyst suggested in a research note Monday.

Last month, the applications-software maker, under intense pressure to outperform in order to fend off rival Oracle's(ORCL - Cramer's Take - Stockpickr) hostile takeover, reported pro forma earnings of 17 cents a share, beating analyst estimates gathered by Thomson First Call by 6 cents.

But to achieve those pro forma results, PeopleSoft excluded an expense tied to its acquisition of J.D. Edwards that it had included for other previous acquisitions, noted Sanford C. Bernstein analyst Charlie Di Bona, who has an underperform rating on PeopleSoft. (His firm doesn't do investment banking business.)

In particular, PeopleSoft excluded research and development expenses -- called capitalized software amortization in accounting parlance -- related to its purchase of J.D. Edwards.

Such expenses are relatively unique to software acquisitions, and work like this: When one company buys another company, it must allocate the purchase price to various tangible and intangible assets. In the software world, that often means the acquiring company will allocate acquired software to an asset line called capitalized software on its balance sheet.

The acquiring company then basically depreciates that asset over a period of time, moving an equal portion from the balance sheet to a research and development expense on the income statement each quarter.

Under two prior acquisitions, of Annucio Software and spinoff Momentum Business Applications, PeopleSoft included the expense from capitalized software -- totaling $4.2 million -- in its pro forma numbers. But in its third-quarter numbers, PeopleSoft decided to exclude the capitalized software expense related to the J.D. Edwards acquisition -- totaling $8.7 million -- from its pro forma results.

Basically, that means PeopleSoft boosted its pro forma third-quarter results by $8.7 million, which Di Bona figures pushed pro forma earnings per share up a penny to 17 cents a share and operating margins up by 130 basis points to 13.2%.