Barron's Writing
(posted on wrong place, at wrong time)
PeopleSoft No-Show Only Makes Things Worse
By ERIC J. SAVITZ
Something seriously strange happened last week at PeopleSoft. The company, which sells pricey financial-management and human-resources software, had been scheduled to give a talk last Tuesday at the BT Alex. Brown tech conference in Baltimore. Monday night, a PeopleSoft exec phoned James Moore, the Alex. Brown analyst who follows the company, to cancel. Both Moore and PeopleSoft knew well what would happen if they pulled out at the last minute: The stock would get crushed, especially since PeopleSoft shares had already been under pressure. The Street has been fretting about both a slowdown in PeopleSoft's growth rate and increasingly aggressive competition from SAP, its arch-rival in the ERP, or enterprise-resource-planning software market.
Nonetheless, PeopleSoft declined to come. It might not have been so bad if the company's leaders had a reasonable excuse, but they didn't. PeopleSoft just completed its third quarter, like every other company on a calendar year. The presentation would have come exactly one week before this Tuesday's scheduled earnings announcement. No doubt a significant fraction of the presenting companies at the conference were in the same boat. Nonetheless, PeopleSoft apparently feared the format of the presentation -- a short canned talk, followed by a lengthy Q&A featuring queries that PeopleSoft had received weeks earlier -- could lead to inappropriate disclosure of market-sensitive information. Of course, the company knew both the date of the meeting and the date on which it would report earnings, and still had agreed to come. What changed the night before is hard to say. Certainly, it looked suspicious to investors.
Perhaps all will become clear Tuesday, when PeopleSoft releases third-quarter earnings. The Street expects profits of 17 cents a share, on revenues of $340 million-plus. If they miss the numbers -- and most observers expect them to be on target -- look out below. More important, says Moore, will be the guidance PeopleSoft provides on both the fourth quarter and 1999. PeopleSoft -- watchers will be especially keen to see the company's licensing revenue growth. Most observers expect year-to-year gains north of 40%. If the figure disappoints, the stock will dive.
Until Friday, when it rallied nicely, PeopleSoft's stock has been in full scale retreat. It closed that day at 22 3/8, 86 cents below its price a week earlier. In April, the shares peaked at about 55. The Street expects 1999 earnings of 90 cents a share, up an expected 34% from an estimated 67 cents this year. The stock, which for many months traded at a frighteningly large earnings multiple, now sports a P/E of about 22, just a tad ahead of the S&P's. But it's growing far faster than the benchmark index.
Which makes you wonder if the stock has become a bargain. Well, maybe. But PeopleSoft faces challenges that could hamper its progress for months to come. For one thing, there's a growing suspicion on the Street that the slowing growth in PeopleSoft's software licensing revenues relates to the winding down of stepped-up demand related to corporate efforts to attack the Year 2000 problem. It can take as long as 18 months to roll out the kind of complex programs offered by PeopleSoft, SAP, Baan and their ilk; the closer we get to 2000, the less likely companies will be able to attack the problem by installing new systems.
At the same time, it's unlikely demand for ERP systems will grow as quickly if the economy slows. That's especially true at the financial, manufacturing and technology companies, which make up a big slice of ERP customers. There's also increasing evidence the market for big ERP systems is reaching a saturation point -- that most large enterprises have them in place. Not least, SAP reportedly has taken extraordinary steps to compete with PeopleSoft. In some cases, Moore says, SAP has essentially agreed to allow new customers to defer payment until the system is fully functional, a process that can take a year or longer. With SAP on the attack, pricing has been under pressure.
Finally, PeopleSoft has compounded its own problems with the Street by its stubborn refusal to provide information. Unlike other tech companies, PeopleSoft doesn't hold quarterly conference calls with analysts; in fact, in PeopleSoft's history it has held that kind of mass audience with investors just once. That one, just a few weeks ago, left investors optimistic about PeopleSoft's prospects. But the era of good feeling didn't last.
Brian Skiba, who tracks the stock for Lehman Brothers, is one of the few remaining PeopleSoft bulls. He thinks the stock's slide has less to do with fundamentals than with a devastating shift in investor psychology, and advises loading up. But we tend to agree with Moore, who rates the stock "neutral," that it could be months before PeopleSoft can shake off the heavy burdens that have been weighing on the shares. "Sure, it's cheap, if you have the stomach to ride it out," Moore says. "But there are so many issues weighing on the sector. There are all of these unknowns. There are very real risks for everyone in the applications business right now." Moore recently lowered his estimate on the three- to five-year growth forecast for the industry to 25%, from 30%-35%. The industry, while still growing, has begun to mature. And that's not good for PeopleSoft.
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