PeopleSoft Meets Reduced Estimates

Software license revenue declined 13% year over year and next quarter will be flat.

Author:: Ronna Abramson
Publish date:: Apr 25, 2002 6:56 PM EDT

Updated from 5:58 p.m. EDT

PeopleSoft

(PSFT)

, the software maker that preannounced disappointing first-quarter results April 1, said Thursday that a slowdown in technology spending led to a 13% year-over-year decline in license revenue and 6% decline in software revenue in the first quarter.

The Pleasanton, Calif.-based company predicted demand will be flat in the second quarter, with a potential pickup in the second half of the year.

"It sounded like a broken record," Brent Thill, an analyst with Credit Suisse First Boston, said of PeopleSoft's guidance, noting its similarity to other software company comments. And "it sounds like what we heard last year. "We're searching for a bottom." Thill, who has a hold rating on PeopleSoft, said it's looking like a recovery might not arrive until 2003. His firm hasn't done any banking with PeopleSoft.

For the first quarter ended March 31, PeopleSoft said it earned net income of $44.5 million, or 14 cents a share, as preannounced April 1. That was in line with guidance from the company previous to the preannouncement and with reduced estimates on Wall Street, according to Thomson Financial/First Call. In the same period a year ago, PeopleSoft registered net income of $36.1 million, or 11 cents a share.

The business software company reported $483.3 million in revenue, compared to $514.2 million in revenue a year ago. Analysts had been expecting the company to report $481.5 million in revenue, according to Thomson Financial/First Call.

License revenue totaled $133 million -- falling in the range of $130 million to $135 million given by the company in its preannouncement. PeopleSoft had previously forecast license revenue of $160 million.

Sequentially, revenue declined 18.7% from $528.2 million in the fourth quarter, and license revenue declined 23.4% sequentially from $174.1 million in the fourth quarter.

In a postclose conference call, PeopleSoft CFO Kevin Parker said he expects second quarter earnings and revenue to remain sequentially flat. Analysts were expecting the company's earnings to go up a penny sequentially to 15 cents a share and revenue to increase to $506.9 million.

Parker declined to update guidance for the full year but said the company is looking for demand to pick up in the second half of the year. In January, PeopleSoft said it expects earnings of 70 cents to 75 cents in 2002. The consensus estimate is for PeopleSoft to earn 66 cents a share on $2.1 billion in revenue.

PeopleSoft has been considered one of the more solid players in the enterprise software market. But concerns relating to its subsidiary Momentum Business Applications, which it bought back in April, have turned some investors away. Some analysts have suggested that Momentum, combined with changes in the way PeopleSoft writes contracts with customers, allowed PeopleSoft to overstate pro forma earnings in 2001. That, they fear, could set the stage for lower earnings in 2002. The contract changes allowed PeopleSoft to tap deferred revenue to bring up its top line in past quarters.

"I think the good thing for PeopleSoft is that Momentum and pulling license revenues from deferred, all this stuff, is starting to unwind," said Nathan Schneiderman, an analyst with Wedbush Morgan Securities. "We're getting to look at PeopleSoft in a purer state."

Given the conservative guidance given by other software companies such as

Siebel Systems

(SEBL)

, Schneiderman said he didn't expect investors to be very surprised by PeopleSoft's forecast for the second quarter. He has a hold rating on PeopleSoft and his firm hasn't done any banking business with the company.

Both Schneiderman and Thill commended PeopleSoft for tightly managing its expenses to make bottom-line guidance.

Others have suggested PeopleSoft's growth will taper off as a greater percentage of customers complete their upgrades to PeopleSoft's latest Internet-based applications, called PeopleSoft 8. CEO Craig Conway took on those charges on the conference call, noting that only one-third of the company's customers have licensed PeopleSoft 8.He also noted that license revenue from new customers -- versus existing customers -- was responsible for overall license revenue declines in the first quarter. That indicates a slowdown in spending on new systems, he said.

"As Q1 came to an end companies did not seem to have enough hard data that their own company had recovered and therefore the confidence to return to normal spending," Conway said. "Did we see the slowdown coming? Absolutely not."

Since the company preannounced disappointing earnings in license revenue April 1, shares of PeopleSoft have fallen nearly 40%. Shares of PeopleSoft fell 59 cents, or 2.6%, to close at $21.89 Thursday. After the company announced earnings, shares fell to $21.43 in after-hours trading.