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PeopleSoft's Got Some Explaining to Do

Most importantly, it needs to show that a 37% miss in license sales was a one-time event.

PeopleSoft (PSFT) shocked investors earlier this month when it warned that license revenues will be 37% below company projections. When it reports earnings after the close on Tuesday, it will need to convince Wall Street that what happened in the first quarter was a result of factors, such as the war in Iraq, that were beyond the enterprise software company's control.

And that may be tough.

"I don't believe all of this miss can simply be attributed to the war causing deals to be delayed. A 10% miss could be attributed to this, but not a 37% miss," said Pacific Growth Equities analyst Patrick Mason.

Similarly, Tad Piper, who covers PeopleSoft for US Bancorp Piper Jaffrey, said the company's competitors didn't do as badly. He noted that

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had a

good quarter and maintained full-year guidance, and although

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Systems

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warned, its miss will likely be much smaller. "There may be company-specific factors," he said. (Neither Pacific Growth nor Piper Jaffrey have a current investment banking relationship with PeopleSoft.)

However, PeopleSoft has apparently maintained good internal discipline -- and if there is a smoking gun, news of it hasn't leaked.

Moreover, industry analysts, who tend to be closer to customer and product-centric issues than the financial analysts, say the miss was probably due to external issues. "I'm not seeing PeopleSoft-specific issues," said analyst Erin Kinikin of Forrester Research, a Boston-based market researcher specializing in IT issues. Kinikin added that queries from potential CRM customers to her firm were off about 30% during the quarter, a sign that customers were generally putting off purchases.

The Pleasanton, Calif., company now expects first-quarter earnings of 11 cents to 12 cents a share on total revenue of $450 million to $455 million. Wall Street had expected the company to earn 14 cents on revenue of $483.6 million in the March quarter.

On April 3, PeopleSoft reduced its guidance for a key measure -- revenue derived from license sales -- from a range of $125 million to $135 million, to $80 million to $85 million.

For PeopleSoft shares not to take another hit on Tuesday, analysts say the company will have to show that external issues caused the miss, and even more importantly, give strong guidance for the June quarter. Analysts polled by Thomson Financial/First Call now expect PeopleSoft to earn 12 cents a share on sales of $467.8 million in the second quarter. If the company guides any lower, it could get ugly.

Getting Small

The market is also looking for evidence that PeopleSoft is succeeding in its push into the midsized business market.

Last week, the company delivered 13 products designed for companies with $50 million to $500 million in annual revenues. Jeff Read, PeopleSoft's vice president for midmarket solutions, said in an interview that the time is right for medium-sized companies to increase IT spending. "During the Y2K scramble, large companies replaced infrastructure, but the midmarket players repaired their infrastructure, leaving many legacy systems in place."

And he cited surveys claiming that potential midmarket customers include about 62,000 companies that have not yet deployed a modern enterprise software infrastructure.

According to Read, the company does not break out revenue by company size, so it will be difficult to get a handle on growth in this area. He did say that about 25% percent of the company's customers are midmarket companies, and that last year, almost 40% of new PeopleSoft customers fell into that category.

However, some industry analysts think the company is having problems convincing smaller enterprises to sign up. "Distribution is different, the customers are different, vendors need a different mindset," said Art Scholler, who follows CRM for the Boston-based Yankee Group.

PeopleSoft is moving in the right direction, said Forrester's Kinikin, "but midmarket customers are skeptical that enterprise packages -- even if scaled back to suit them -- are affordable to manage."

PeopleSoft closed at $16.50 on April 3. The postclose warning sent the shares tumbling south as far as $14.82 on April 9, a loss of 10.2%. On Monday, PeopleSoft gained 6 cents, less than 1%, to $15.79 a share.