How PeopleSoft weathered the perfect storm
Thursday October 24, 8:51 am ET
By Paul Abrahams in San Francisco
When Craig Conway took the helm of PeopleSoft in 1999, he hired consultants McKinsey to conduct a strategic review. It was urgently needed.
Even though the industry was enjoying an unprecedented boom, the Silicon Valley-based enterprise software company was posting operating losses.
McKinsey recommended selling the company. Mr Conway said "Thank You", paid the consultants' bill and ignored their advice.
Today Mr Conway's decision looks inspired. The enterprise software industry may be in turmoil but PeopleSoft, which reported last week, has held up well. While most of its rivals are losing money, PeopleSoft reported better-than-expected earnings of 14 cents a share on revenues down 9 per cent at $471m. The group remained cashflow positive at the end of the last quarter with $1.8bn of cash and equivalents.
"We are among the healthiest of the enterprise software companies," says Mr Conway. "In 2001 we had a great year. And in the first half of 2002, even though revenues were down 8.7 per cent, we generated more operating earnings from recurring businesses than in the same period of 2001."
That is not to say that PeopleSoft has emerged unscathed from the downturn. "We are in the midst of the perfect storm. The global economy is bad, the accountancy problem is bad, and the homeland security issue is bad," Mr Conway says.
The result is that global corporations remain reluctant to invest. "In 1999 corporations' spending was motivated by fear," says Kevin Parker, chief financial officer. "But at the moment most people are spending below budget. That is likely to continue in the fourth quarter."
A combination of diversifying its revenue base and attention to cost has permitted the group to weather the difficult environment. PeopleSoft has extended its product range beyond its traditional strength of human resources software to customer relationship and supply chain management. This has allowed it to cross-sell to its established base.
"When you have 10 products and three of them are struggling, you still have seven you can sell. If you have one product you are in trouble," says Mr Conway.
Another reason for the relative resilience of PeopleSoft is that it has three revenue streams. Mr Conway characterises PeopleSoft as a three-legged stool, generating revenues equally from licences, maintenance and consulting. "The second two are not as vulnerable. They act as shock absorbers."
The final reason for PeopleSoft's strength is its careful attitude to costs. During the first nine months, the company has taken $157m out of its cost base. "We have done that without big job losses. We explained to our 8,500 staff that if they save $500 each that is a penny a share," says Mr Conway.
He remains resolutely upbeat about the future. "When revenues are flat, the only way to increase profits is to improve operational efficiency. The only question is whether CEOs are prepared to invest to get operational efficiency. Now is the time to make those investments," he says.
The industry's consolidation is also likely to benefit PeopleSoft. Mr Conway expects many of his competitors to fail. In the past 12 months he has made five opportunistic acquisitions and would be willing to make more if they were accretive to earnings within a year. "In the darkest of circumstance, I am the most optimistic." |
