PeopleSoft's

(PSFT)

third-quarter results were generally viewed as

respectable by Wall Street analysts, but a closer look revealed some deteriorating numbers,according to a note Monday from accounting guru HowardSchilit's Center for Financial Research and Analysis.

In the four-page note, the Center points out thatPeopleSoft's deferred revenue and cash flow fromoperations dropped in the third quarter, which endedin September. In addition, the company's operatingincome was boosted by a drop in research anddevelopment spending, especially when includingPeopleSoft's controversial spinoff of Momentum BusinessApplications, which PeopleSoft

reacquired in the second quarter.Schilit and PeopleSoft were not immediately reachablefor comment.

PeopleSoft's deferred revenue in the quarter,which the company addressed on its earnings call,dropped by $40.3 million sequentially and $16.4million year over year. Deferred revenue also declinedsequentially in the third quarter a year ago, but byonly $21.3 million. Among other things, a drop in deferred revenue may signal a decline in the company's future revenue or that a company is draining its revenue backlog to make numbers.

PeopleSoft has said seasonality is partiallyresponsible for the drop, but also blamed a billingdelay for the decline. If fourth-quarter deferredrevenue increases more than normal, that wouldindicate the reason was legitimate, noted JMPSecurities analyst Pat Walravens, who has anunderperform rating on PeopleSoft.

Still, "PeopleSoft was not specific about what itwas in their billing process that fell apart, and thatcauses you to be a little bit suspicious because youwould think the billing process is something asoftware company has got down pretty well," Walravenssaid. His firm hasn't done any investment banking inthe software sector.

PeopleSoft's cash flow from operations -- oftenviewed as a better barometer of a company's businessthan net income -- also weakened during the thirdquarter and in the nine months ended in September, Schilitnoted. CFFO totaled $23.8 million at September 2002,vs. $73.6 million in the previous quarter and$122.5 million in the year-ago period. In thenine-month period, CFFO declined by $93.4 millionyear-over-year to $238.2 million, Schilit reported.

Meanwhile, on the expense side, PeopleSoft'sresearch and development spending dropped sequentiallyby $4.5 million but increased by $12.1 millionyear over year. However, the numbers told a differentstory when Schilit recalculated R&D costs to includeexpenses from Momentum Business Applications, aspinoff that PeopleSoft created to foot the costs ofdeveloping its latest software edition, PeopleSoft 8.

Including development services funded by Momentum,Schilit found research and development spendingdeclined year over year by $9.7 million in the thirdquarter, boosting the company's operating results.

The problem is, PeopleSoft will not be able to cutR&D spending forever. The company will soon have tostart investing more to develop new products becausePeopleSoft 8 came out more than two years ago, notedWalravens. "They are on the tail end of a productcycle," Walravens said.

Shares of PeopleSoft closed Monday up 11 cents, or 0.6% at $20.10.