PeopleSoft Numbers Reveal Its Weak Hand

But those easy comps are a result of PeopleSoft underperforming most of its competitors last year. German behemoth SAP(SAP Quote) suffered a smaller 6% decline in software licenses in 2003, while Oracle's applications business posted a 3% increase in license revenue.

Because PeopleSoft did not break out JDEC numbers until late last week, analysts have been adding together results for PeopleSoft and J.D. Edwards from a year ago and comparing them to the combined company's results to gauge PeopleSoft's current business. But that method is imperfect because the two companies' quarters ended at different times.

That imprecise approach showed the combined company's license revenue shrunk in the double digits -- though not 20%, said Sanford C. Bernstein analyst Charlie Di Bona, who has an underperform rating on PeopleSoft.

"One of the things we've been saying all along is the growth here they've been posting in their press releases is an artifact of the acquisition," he said. (His firm doesn't do investment banking, but its parent, Alliance Capital, holds PeopleSoft shares.)

In a note downgrading PeopleSoft to a sell rating less than two weeks ago, Merrill Lynch analyst Jason Maynard suggested the same thing. "In our opinion, a primary reason for PeopleSoft's acquisition of J.D. Edwards last June was to make up for the absence of organic growth," he wrote. (His firm hasn't done any banking with PeopleSoft.)

A good company shows growth in both its core business as well as through acquisitions, added JMP Securities analyst Pat Walravens, who has a market perform rating on PeopleSoft. "The problem with these acquisitions is sometimes they can mask a real problem in the core business," he said. (His firm hasn't done banking with PeopleSoft.)

PeopleSoft attributed the decrease in license sales in 2003 to the war in Iraq and the global economic downturn. But industry observers say that doesn't tell the whole story.

Rather, some believe PeopleSoft has sucked all the sales out of the latest version of its enterprise software -- called PeopleSoft 8 -- which helped the company outperform its peers between 2000 and 2002. Maynard estimated that more than 80% of PeopleSoft's 5,400 customers have upgraded to that latest version of its software, curtailing the potential for new-license revenue.

On Monday, shares of PeopleSoft fell 51 cents, or 2.5%, to $19.79, well below Oracle's most recent offer of $26 per share.