What Slowdown? PeopleSoft Boosts 2001 Guidance

Updated from 7:08 p.m. ET

PeopleSoft(PSFT Quote - Cramer on PSFT - Stock Picks), the business software company that was left for dead just a year ago, upped its earnings outlook slightly for 2001 after posting better-than-expected fourth-quarter results Tuesday.

The company said it expected to earn 55 cents to 60 cents a share this year, putting the high end above the 57 cents a share that analysts are projecting, according to First Call/Thomson Financial. For the first quarter, the company said it would earn 9 cents per share, in line with expectations.

"Overall, it was a good, clean solid quarter with a positive outlook," said Craig Wood, an analyst with Merrill Lynch who rates the stock an accumulate/long term buy. "That's what the market was looking for." (Wood's firm hasn't done underwriting for PeopleSoft.)

In after-hours trading, PeopleSoft's stock shot up to $52 on Island before coming back down to $49.56. It ended the regular session down 50 cents at $48.94.

The company said it didn't boost guidance more because of uncertainty over technology spending.

The Macro Picture

"While we're aware of a macroeconomic slowdown, we do not see any current signs of slowing of demand for e-business applications," said CFO Kevin Parker. "Having said that, if macroeconomic conditions worsen dramatically, we believe all businesses will be impacted."

In the fourth quarter, PeopleSoft had net income of $41 million, or 13 cents a share, on $498 million in revenue. Analysts were expecting earnings of 9 cents a share on $458 million in revenue, according to First Call.

Software license revenue of $165 million represented 33% of the company's quarterly sales.

The results follow better-than-expected results at competitors Oracle(ORCL Quote - Cramer on ORCL - Stock Picks) and Siebel(SEBL Quote - Cramer on SEBL - Stock Picks), as well as German software giant SAP(SAP Quote - Cramer on SAP - Stock Picks). But the victory over the Street's expectations might be even sweeter at PeopleSoft.

Bad Times

Last May, its stock was trading at just $12 as the company struggled with oldfangled software that used the PC desktop as its main operating environment. Since then, it has re-engineered its programs to run over the Internet, a push that culminated in the September release of its PeopleSoft 8.0 suite of business software. The company now is boasting about 1,000 orders for parts of that suite, which is largely responsible for the latest run in its stock.

Jim Pickrel, an analyst at J.P. Morgan H&Q who rates PeopleSoft a buy, had nearly given up on the software giant a year ago. "I give credit to [CEO] Craig Conway for coming in, I guess about 18 months ago now, and making some tough decisions." (Pickrel's firm hasn't done underwriting for PeopleSoft.)

Conway took over the CEO post at PeopleSoft in September 1999 after joining the company that May from e-learning software company OneTouch Systems. Like so many software bigwigs in Silicon Valley, he is a former Oracle executive.

Of course, PeopleSoft is a big competitor of Oracle. And while Oracle made an earlier switch to Internet-based software, PeopleSoft's efforts have clearly caught the database giant's attention. Monday night, Oracle's public relations agency sent out briefing documents to reporters regarding PeopleSoft's earnings, urging them to "remain skeptical" of the company's product claims.

Ready, Aim, Fire

On its conference call, though, PeopleSoft fired right back. CFO Parker said that the firm won 15 deals against Oracle in the fourth quarter, and 15 more against SAP. Siebel, he said, lost five times to PeopleSoft.

"PeopleSoft 8 is a better suite of pure Internet business applications than that of any of our competitors," Conway said. "As the industry has recognized this, our sales figures have gone up."

Merrill's Wood says PeopleSoft's claims should be kept in perspective, though.

"That's a bit of saber rattling that you come to expect in the industry," Wood said. "I don't think it's untrue, but the story behind the company is that it's on a new product cycle. It's not surprising that they're doing well."

Investors should also be cognizant of the company's valuation. It's trading at 90 times 2001 earnings, which is a heady price for even a software company. Oracle, for instance, trades at 60 times 2001 earnings estimates. PeopleSoft's Conway, however, points to his company's valuation on a market cap-to-revenue basis. PeopleSoft shares trade at about 7.5 times calendar 2001 revenue, while Oracle trades closer to 13.7 times 2001 revenue.

In the past, PeopleSoft's revenue has shifted more toward the services, or consulting, side of the software business. But Conway has vowed to turn that trend around, something that appears to be happening. Fourth-quarter license revenue was 33% of sales, up from 30% shown in the third quarter. Software license revenue is important because it brings in higher profit margins than consulting services.

"They've spent $500 million and two years now turning the company around," said Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray who initiated coverage on PeopleSoft Tuesday with a buy rating. "I think we're beginning to see the fruits of their labor." (His firm hasn't done underwriting for PeopleSoft.)