Here's a stock I'd like the mo-mo's to start buying. My average cost is about $20 bucks a share.
>December 9, 2001
software is at the heart of the company's help desk, featured here. James Baird / Union-Tribune photos
Peregrine Systems workers were ready for a much-needed weekend two Fridays ago when the telephone lines lit up.
People were calling, asking why the company's sales were down. The stock price dropped 5 percent, then 10 percent, then 15 percent. The media demanded answers.
"What's going on?" everybody asked.
Peregrine executives wondered the same thing. The company was fine, and nothing major had happened. After a while, the culprit became clear: Phoenix, Ariz.
Actually, it was what didn't happen in Phoenix. Contrary to reports that appeared on some Internet sites, company executives at a conference there did not say sales were slow.
The company furiously tried to correct the rumors, but the stock would stay down for the day. Peregrine had a black mark it didn't deserve.
The Phoenix episode is as good an indicator as any of the bizarre state of the software industry, where even a whisper of a rumor can wreak havoc, and of the economic climate in which Peregrine is charting a course.
This year wrecked tech companies. Stock prices are in the basement, and layoffs and bankruptcies are no longer unusual. Investors have moved beyond skittish and are bordering on manic.
In some ways, though, the current market is a boon for Peregrine. The company's products help businesses track costs and save money -- a huge priority right now.
At a time when so many competitors are suffering, the San Diego company is still a Wall Street darling. Nearly every analyst following the company has rated it a "strong buy" or "buy."
Peregrine is on track to bring in sales of $800 million in its fiscal year, which ends March 31, and more than $1 billion the year after that.
The company is one of San Diego's biggest, but don't feel bad if you haven't heard much about it. Peregrine doesn't have the cachet of Qualcomm or the cutting-edge reputation of an MP3.com. Even its analysts have a hard time explaining to clients exactly what the company does.
To put it simply, Peregrine helps companies figure out what they have and whether they are using everything the way they should.
One financial institution using Peregrine software discovered it was paying for 2,000 telephone lines it wasn't using. A New York City bank found out it was letting new computers sit for six weeks before delivering them to employees.
Peregrine never really gained the market recognition of some of its competitors, such as software companies Ariba or Commerce One. But in hindsight that's probably a good thing. Ariba's stock price soared to $90 in the past year, but has fallen to around $5. Commerce One went from $45 to about $3, and another competitor, i2 Technologies, fell from $70 to about $7.
Peregrine didn't see those kinds of dizzying highs and lows. Its stock price is at nearly $16 -- not bad by today's standards.
The company was relatively obscure until 1991, when San Diego Padres owner John Moores invested in it and became the majority owner. Moores remains on the company's board of directors, and holds about 1.1 million company shares.
Peregrine went public five years ago and often was overlooked, outshined by flashier competitors.
"We were kind of meat-and-potatoes, helping customers understand what they own and how they use it," said Andy Cahill, who is the head of Peregrine's customer relationship group. "That wasn't very exciting to people."
Even now, the culture at Peregrine isn't very sexy. Its annual report is text-heavy, efficient and to the point -- not the glossy, photo-album approach that other companies favor. Its slogan -- "frictionless business" -- sounds more like a science fair project.
"We're a very practical bunch," said Louis Blatt, the leader of Peregrine's solutions group. "We understand what needs to be done, and theory is fine but we try and bring it into practice."
of resilience
Unlike companies that pinned hopes on one major product, Peregrine diversified its business software lines enough to carry it through these tumultuous times, analysts say.
"We think they're a leader," said David Breiner, an analyst with Bear Stearns.
Still, Peregrine had a disappointing last quarter and cannot escape the downturn in the software industry.
Sales deals fell through after Sept. 11 as companies put spending plans on hold. Although some of those agreements have since closed, Peregrine's average deal size fell from $300,000 earlier this year to $200,000.
Steve Gardner, Peregrine's chief executive officer, said the last three weeks of September were probably the hardest of his business life.
"I feel the company was tested, and I suspect we will be tested as we go through these uncertain times in the future," he said. "But I think what we've proven out of that testing is that we're resilient."
Peregrine warned investors in October that it would bring in 5 cents a share for the quarter, lower than the 8 cents analysts had expected. It was the first time the company has missed its estimates, but analysts seemed to take the news in stride.
"It's not clear to me that (Peregrine) got hit disproportionately harder than many software companies did," Breiner said. "We're giving high-quality companies the benefit of the doubt when it comes to their September results."
The industry is turning to smaller deals -- largely because big contracts are scarce these days -- and Peregrine has launched a new effort aimed at small-and medium-sized businesses.
Its new software product, called Xanadu, keeps track of everything on a company's computer network. It can tell when workers are downloading music or doing other things that use up network capacity. It also makes sure a company's software licenses are up to date.
Until now, Peregrine had focused on larger companies, and has deals with more than 90 percent of the Fortune 500 companies. But the market for services to small-and medium-sized businesses is $53 billion in the United States alone.
"It's definitely a huge opportunity," said Gary Lenz, who heads up the Xanadu effort.
for acquisitions
It's also badly needed proof to the investment community that Peregrine is developing its own ideas and products instead of buying them.
The company has made eight acquisitions over the past two years, including Harbinger, an e-commerce technology developer in Atlanta, and Remedy Corp., a technical support software company in the Bay Area.
That aggressive appetite for acquisitions has branded Peregrine to some investors as a company that lacks its own product innovation and is trying to "roll up" an industry, said Adrian Larson, an analyst with research firm Soundview Technology Group.
"That's what kind of scares people and turns people off when they hear the story," Larson said. "The most hated phrase that you can hear when you talk about a company is 'They're a roll-up,' and I hear that all the time."
Gardner said Peregrine has purchased elements of its technology, and the company's research team built upon those elements and turned them into unique products.
"It's absolutely a lot of malarkey that this company doesn't value innovation and invention as one of our core capabilities," he said. "We felt it was faster to go to market through acquisition than development, not because we don't know how to do development. We can do development just fine."
Gardner points to General Electric and IBM -- companies that grew to be conglomerates through acquisitions. No one would accuse them of lacking internal innovation, he said.
"People have gotten used to thinking of them as a thought leader, as I would hope they will get used to thinking of Peregrine as a thought leader," he said.
Peregrine's acquisition of Harbinger still haunts the company today, and analysts are split over whether the decision was sound.
Peregrine bought the company for $1.45 billion last year in one of the last giant deals before the dot-com industry tanked. Investors wondered whether the price was too high and if the deal made sense, and Peregrine's stock plummeted 37 percent after the announcement.
The value of the acquisition has dropped sharply since then, and caused Peregrine to write off $359 million in non-cash charges in its last quarter. The company wrote off $490 million, also in non-cash charges, for similar reasons in its 2001 fiscal year, which ended in March.
"In hindsight, they clearly overpaid," said Bud Leedom, who analyzes San Diego companies for Wells Fargo Van Kasper. "They were one of the last companies to really pull off an acquisition like that before the market got hit."
But even so, the acquisition might be considered a good idea in the long run, Leedom said.
Gardner said Peregrine has integrated Harbinger's technology so thoroughly that it might be hard for people to see direct improvements. One benefit is clear: Since the acquisition, the number of daily e-commerce transactions using Peregrine software has risen 30 percent to 1.3 million.
Looking back at the acquisition, Gardner conceded that Peregrine might have mishandled some things. There is a golden rule in the investment community that Peregrine broke: Don't spring surprises on investors.
"Not only did we surprise them, we baffled them," he said. "That's a really bad combination."
The acquisitions have turned Peregrine into a company so diverse it has no direct competitor. Dozens of companies compete with Peregrine in some areas, but no one does everything that Peregrine does.
to basics
The company continues to diversify, developing products that push into new areas. Peregrine announced Tuesday was working on software to help government agencies and businesses prepare for unexpected emergencies.
The idea for the "Crisis Management Initiative" came from Peregrine's employees after Sept. 11. The suite of software products can help agencies collect real-time information on numbers of emergency forces, military workers, hospital beds and supplies of vaccines, for example.
The first of these products will go on sale next spring, and it will likely be a highlight of 2002 for the company.
Gardner said the next six months will be a time of "basic blocking and tackling," in football terms. Deals will be smaller than usual, and a return to basic business will be pervasive.
"There's nothing glamorous about it, but if you don't do it you'll end up losing ballgames," he said.
Gardner has been at the helm of Peregrine for four years, and during that time has pushed to make the company more accepting of -- and more responsive to -- the idea of change.
In Peregrine's fast-paced industry, being light on one's feet is an absolute requirement. Peregrine has taken that concept to the extreme -- quickly swallowing up one company after another, for example, and developing crisis-focused software just weeks after Sept. 11.
"If we're better at embracing change, we can absolutely beat the competition," Gardner said. "We all realize that part of being successful is we make change an ally while everybody else treats it as an enemy." |
