Can PeopleSoft Handle the Software Slump?

Kevin Parker is telling Wall Street about his company's new software strategy. But is the Street listening?
Craig SchneiderMarch 6, 2001

Until recently, precious few technology companies had it as good as PeopleSoft Inc. CFO Kevin Parker had the good fortune to tout his company’s strong results from 2000 and an optimistic outlook for 2001. That made the company a rare outpost of financial stability.

Unfortunately, some of the optimism that lifted PeopleSoft earlier in the year has been reined in. The stock has lost more than half its value since it announced an otherwise solid earnings report.

Like many CFOs, Parker is one of his company’s key spokesmen to the Wall Street hordes. But at a time when the economy is weakening and companies across the corporate spectrum are slashing their IT budgets, Parker is under more pressure than before to build upon last year’s stellar turnaround. In 2000, the company earned $145 million, reversing the $177.8 million loss it suffered in 1999.

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Parker is well aware of his challenge. “PeopleSoft is trying to accelerate top-line license revenue growth for the software and return to historical profit levels, so it’s a bit of a tightrope you walk,” he says.

The company’s traditional market has been in enterprise resource planning (ERP) software, but its future hinges upon how well it can broaden its business by moving into customer relationship management (CRM). In the ERP market, it’s banged heads with SAP AG and Oracle. In CRM, the company is going toe-to-toe with market leader Siebel Systems.

Parker hopes the revamped product strategy expands operating margins to a range between 15 percent and 20 percent, compared to 11 percent in the fourth quarter, and this is the message he’s been selling to Wall Street.

In the fourth quarter, the company’s license revenue grew 73 percent while it added 150 customers, stealing several accounts from competitors SAP, Oracle, and Siebel.

Yet after reporting its solid growth in 2000, the company refrained from upgrading its guidance to the Street for the current year. While Parker calls the guidance “aggressive enough,” the company’s shares have swooned in recent weeks, a clear sign of Wall Street’s displeasure.

CFO magazine readers may also remember he was profiled for the January 2000 article “The Next Wave” as one of the most promising finance leaders in the 40-and-under generation.

Parker joined PeopleSoft in October of 2000 from Aspect Communications Corp., a CRM software vendor based in San Jose, Calif. It’s a helpful background, considering PeopleSoft’s “highest product priority” this year, according to Parker, is penetrating the fast-growing CRM market.

The core ERP business is strong enough to generate a solid revenue stream even during an otherwise weak economy, but the CRM side is expected to drive the company’s growth.

But for some analysts on Wall Street, the jury is still out on the company’s prospects in CRM.

Moreover, because the company’s ERP business is mature, its cost per unit of sale is actually lower there than it is in the CRM business, where the firm is still investing heavily to build a new business.

“CRM is supposed to focus on top line, for [improving] on revenue and sales, as opposed to cutting expenses,” says Timothy Tow, senior analyst at Gartner Inc. “Now you may see a shift back [to ERP].”

Paul Hammerman, research director at Giga Information Group, says, “I think that there is a reasonable level of growth in the ERP market of 20 percent to 25 percent. PeopleSoft, with [its] particular Internet application, should be able to outperform [its] overall market with sales growth.”

In addition, PeopleSoft owes much of its recent turnaround to CEO Craig Conway and his push for the release of PeopleSoft 8, a Web-enabled version of its ERP software. Conway is also credited with instilling a sense of discipline in the corporate culture. Under founder David A. Duffield in 1999, the firm was known for its quirky culture, which included habits such as calling employees “People People.” Parker is assisting Conway in this task.

“I’m trying to instill a sense of urgency, not only for the finance team but the company as a whole,” Parker says. That sense of efficiency will come in handy as the staff rises some 13 percent to 9,000 “People People” over the next year.

“It’s easy to become bureaucratic within an organization that large,” Parker says. “We want to be as nimble as we were as a small company.”

Perhaps the next major test for the firm will come when it releases its CRM package in June, which will have the same Web-enabled format as PeopleSoft 8.

The company also lags SAP and Oracle on the international front, as its two competitors offer products to more countries and languages. In the fourth quarter, 40 percent of license revenue came from outside the U.S.

“In the long term, we expect it to be 45 percent, maybe 50 percent,” Parker says. “We’ll be putting in expansion plans over the next year.”

Giga’s Hammerman says another important strategy for the company is its middle market initiative. In February, it launched a pre-configured, fixed-price CRM package targeted at companies with less than $500 million in annual revenue.

Of the 150 customers the firm added in the fourth quarter, roughly 23 percent were from the middle market. Parker says: “As we go forward, maybe 40 percent to 45 percent of our customers will come from the middle market.”

However, Parker says there is also a greater credit risk in the middle market than PeopleSoft’s typical customer base. “Global 1000 companies tend to be extremely well capitalized and liquid,” he says. “We have to think of our credit risk profile.” Parker says that involves constantly adjusting to what may be new billing, credit, or support requirements for the market.

The analysts who follow the company are more concerned with the number of competitors in the mid-size sector, and less worried about the credit quality risk. For example, Hammerman notes that the middle market initiative “puts them in to competition with another class of vendors such as Great Plains,” he says, which Microsoft announced it would acquire last December.

But if the competition is tough in the middle market, could PeopleSoft make an acquisition itself to boost its presence there?

While the company’s share value has been weakened, it still has $1.1 billion in cash. PeopleSoft is reportedly eyeing some strategic acquisitions in the sub-$100 million range to help accelerate progress into new markets.

“The acquisitions would be kept on the small size because of the ease of integration,” Parker says. “Large acquisitions can be distracting and we don’t want to take away anything from our mission with PeopleSoft 8.”

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