The haircutting of PeopleSoft ( PSFT) numbers has begun.

For months now, the bears have been saying analysts will have to trim their 2004 estimates because PeopleSoft set unachievable guidance in order to fend off rival Oracle's ( ORCL) hostile takeover bid. That cutting has begun in the past few days, amid speculation PeopleSoft could preannounce a first-quarter revenue shortfall as early as this week.

On Friday, Prudential analyst Brent Thill ratcheted down his estimates, citing Oracle's effect on PeopleSoft business. Previously, he had been projecting PeopleSoft would earn 98 cents a share on $3 billion in revenue in 2004, but lowered his EPS target to 89 cents a share on $2.8 billion in revenue. He also reduced his license revenue estimate for the year to $655 million from $752 million. (Thill has a neutral rating on PeopleSoft; Prudential doesn't do investment banking.)

Thill also lowered his first-quarter license revenue estimate to $130 million from $140 million, his total first-quarter revenue target to $625 million from $635 million, and earnings to 17 cents from 18 cents a share.

In January, PeopleSoft said its business is becoming more seasonal and conservatively projected a sequential decline in license revenue of 25% to 30%, bringing it to $130 million to $140 million. The company forecast it would earn 16 cents to 17 cents a share in the first quarter on total revenue of $625 million to $635 million.

On Monday, ThinkEquity analyst Yun Kim downgraded PeopleSoft to equal weight from overweight, lowered his 2004 earnings estimate by a nickel to 88 cents a share, and cut his 2004 revenue estimate to $2.84 billion from $2.88 billion. Kim sees license revenue falling to $693 million from $739 million.

The cuts brought Kim's targets below PeopleSoft's ambitious 2004 guidance of 92 cents to 95 cents a share in earnings and $700 million to $715 million in license revenue. His revenue estimate falls within the company's targets of $2.8 billion to $2.9 billion. (ThinkEquity hasn't done banking with PeopleSoft.)

Kim argued that fewer large-sized deals could make the company miss its 2004 license-revenue target.

"We believe that time is running out for the company to generate and qualify leads for large-sized deals, which typically have sales cycles that run at least nine months," Kim wrote.

To be fair, PeopleSoft has proved its naysayers wrong before, beating targets for the past three quarters. Just because PeopleSoft may miss its targets for all of 2004 doesn't mean it will come up short in the current first quarter, acknowledged Kim, who left his first-quarter estimates unchanged.

He believes PeopleSoft continues to build sales momentum -- albeit in smaller deals -- and will meet his targets calling for earnings of 16 cents a share on $633.1 million in revenue in the first quarter.

In contrast, Thomas Weisel Partners analyst Tom Ernst lowered his 2004 estimates Tuesday to 92 cents a share on $2.835 billion in revenue from 95 cents a share on $2.875 billion in revenue. Ernst commented that PeopleSoft sales should be getting bigger because of its additional products from the J.D. Edwards acquisition last year. But he maintained his outperform rating, calling a recent drop in the stock an "extremely compelling valuation opportunity."

PeopleSoft's stock has fallen 22.2% since Jan. 22, about double the Nasdaq Composite's decline in the same period. The shares were recently down 1 cent, or 0.1%, to $18.26.

While Ernst believes in the sales and cost-savings synergies of PeopleSoft's J.D. Edwards acquisition, a somewhat uncertain environment for large enterprise software vendors made him "slightly less optimistic" about PeopleSoft's ability to outperform its guidance and consensus expectations. (His firm has done investment banking with PeopleSoft.)

Analysts overall appear to be dubious of the company's ability to meet its high operating margin and earnings targets. Although the consensus estimate has been moving up for several months until now, it still sits at 91 cents a share -- short of the company's target -- on $2.85 billion in revenue in 2004, according to Thomson First Call.

Kim noted PeopleSoft is trading at a significant discount of 21 times his 2004 estimates, compared with SAP's ( SAP) price-to-earnings ratio of 28 and Oracle's P/E of 24. "However, we believe that PeopleSoft currently has the highest execution risk among the three biggest enterprise resource planning companies, and, accordingly, its current valuation is justified," he wrote.

Buyside analyst Gus Zinn with Waddell & Reed echoed that view. "I don't think there's a whole lot of upside," said Zinn, whose firm does not own PeopleSoft shares.

"I'd prefer SAP," Zinn added. "Basically you don't have this issue with Oracle and customers are much more confident that SAP is going to be around for the long haul." His firm is long SAP. (Also Monday, ThinkEquity's Kim upgraded SAP to overweight from equal weight; his firm hasn't done banking with the company.)

But Rich Parower, an analyst for the ( SLMCX) Seligman Communications and Information fund, argued that as soon as the Oracle threat goes away, PeopleSoft's business should enjoy a bounce, particularly in the important government sector. The fund holds PeopleSoft shares.

Oracle is scheduled to fight the Department of Justice's effort to block its acquisition of PeopleSoft in court in June. Oracle abandoned its effort to unseat PeopleSoft directors at the company's annual meeting this Thursday after the DOJ decided to fight the acquisition on antitrust grounds.

Parower also noted that some of the PeopleSoft estimates that have come down recently were on the high side, in some cases even above company guidance. "We're hoping they just execute on their guidance," Parower said. With $4 a share in cash, PeopleSoft shares are "pretty reasonably valued," he added.

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