PeopleSoft Shares Hit on Lukewarm Outlook - TheStreet

PeopleSoft Shares Hit on Lukewarm Outlook

The business-software maker is down 10%.
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Updated from 10:50 a.m. EST.

Investors punished

PeopleSoft

(PSFT)

for its tepid earnings outlook, sending shares lower by 7% on Friday.

The stock closed at $35.91, a loss of $2.52, or 6.56%.

The Pleasanton, Calif., business-software maker registered a profit of $57.8 million, or 18 cents a share, in its fourth quarter, up 28% from $41 million, or 13 cents a share, excluding items, in the same quarter last year. Revenue came in at $528.2 million, up 6% from $497.8 million last year, and software-license revenue rose to a record $174 million. The company said growth was driven primarily by its flagship product PeopleSoft 8.

Analysts surveyed by Thomson Financial/First Call had called for earnings of 16 cents a share on revenue of $521.7 million. Other sources put the consensus revenue estimate at $529.6 million.

"It was an exceptional year on any financial metric," President and CEO Craig Conway said on a conference call. "I'm very excited and very optimistic about PeopleSoft in 2002."

During the call, PeopleSoft executives said they expect earnings of 14 cents to 15 cents a share in the first quarter and 70 cents to 75 cents in 2002. Analysts expect a profit of 15 cents in the first quarter and 72 cents for the year. The company also expects license revenue growth of 15% this year with service revenue growth of 10% and operating margins of 15%.

"They didn't raise guidance, that's the problem right there," said Bert Hochfeld, an analyst at Josephthal. "There was nothing wrong with the numbers, but the stock is selling at over 50 times earnings. So if they're only going to make 72 cents next year, that's a serious problem."

Cautious comments from the firm's CEO may have also put pressure on the stock. Conway said while he's hopeful and optimistic about the coming year, he doesn't expect companies to become more aggressive in their spending. He added that while an economic recovery would certainly help PeopleSoft, he isn't pinning the firm's success on that happening. Indeed, he's predicting only a "mild" recovery in the second half of the year.

"I believe caution and prudence will remain in place until actual evidence of a recovery is in place," he said. Meanwhile, the company continues to watch hiring and expenses "closely."

PeopleSoft has posted earnings growth in each of the past six quarters and has been one of the more solid players in the enterprise software market. But the stock has fallen 5% since the start of the year, in part because of concerns about its accounting practices, specifically relating to its subsidiary Momentum Business Applications.

Conway said PeopleSoft would buy back the unit for $90 million this quarter, which he said would have no material impact on financial results. Conway also defended the unit, saying it came about because of "very good business management" and that he would have done "exactly the same thing" had he been at the helm at the time it was created. "Momentum has been a complete success, returning tremendous value," he said.

Momentum was created in January 1999 with just one employee. The unit hired PeopleSoft programmers to write code for PeopleSoft 8. By doing so, PeopleSoft was able to record its research and development costs as revenue. Although this was legal at the time, the

Securities and Exchange Commission

has since barred companies from such practices.

Analysts had expected PeopleSoft to buy back the unit because the minimum price of purchase was expected to rise in mid-February. Some analysts also noted that the royalty fees paid to Momentum for its work would soon outweigh the costs of an acquisition, making an imminent buy more likely.