PeopleSoft tightens ship to weather storm
Scare tactics and a financial restructuring help CEO Craig Conway steer his company out of rough waters. Analysts salute his efforts at getting things shipshape.
Every weekend in late 1999, now known as the beginning of the end of the dot-com mania, PeopleSoft CEO Craig Conway scoured newspapers and message boards from home, sleuthing out companies that were on the rocks.Then, every second Monday, he would send out an internal memo listing the latest dot-com disaster, along with the number of employees that returned to PeopleSoft after dot-com misadventures. Conway's citations grew from a handful, to 20, to 30, to as many as 40 every two weeks.
Why bother? Conway had to convince his employees to stay with PeopleSoft, a company that was also struggling at the time, instead of jumping ship to a start-up.
"I introduced fear," the 46-year old CEO said, fessing up to his scare tactics as he approaches his two-year anniversary at the helm of the company, which makes software that helps businesses manage human resources, manufacturing, and financial areas.
Conway's methods may seem desperate, but so was the situation. He faced what he called a "perfect storm" of problems. In May 1999, when Conway joined the company as chief operating officer and president (he was promoted to CEO by September) most technology companies were enjoying a boom, but PeopleSoft was weighed down by Year 2000 bug problems, management woes, dull products and a weak stock price.
Though Conway is known primarily for putting PeopleSoft's financial house in order, he said it was his role in tracking failing companies that helped PeopleSoft get where it is today. It was his way to curb attrition at a time when people across the tech sector were bailing for well-paying but less stable start-ups.
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Now it appears Conway's scare tactics and financial restructuring have paid off. His company is one of the few technology firms managing to stand up to the economic maelstrom. Shares have risen to a high of $53.87 this year and continue to trade above $35, while other companies struggle. The company impressed Wall Street in its most recent quarterly report, beating estimates and raising guidance while other tech companies buckle under profit warnings.
And the company is expected to be upbeat at its user conference Monday. Conway suggested the company isn't going to announce any changes to its earnings outlook at the conference, "which you can view as positive, since if we were going to warn, we would do it then," Conway said.
Indeed, analysts believe the conference will generate a "positive buzz," with PeopleSoft expected to provide details about new customers and products.
The company's secret is said to be a software architecture that's more flexible than that of its competitors; but it may have more to do with the person at the helm, whose unique management style has helped the company sail past estimates--a feat analysts say the company may repeat again in its next quarter.
Resilience in a rough climate
Conway has been barraged with interview requests since the company announced a strong second quarter and said full-year results could be up slightly. And the question everyone is asking is: How did you do it?
Conway claims PeopleSoft's resilience in the rough economic climate is due to a combination of macroeconomic factors and the company's software products, which compete with those of Oracle, SAP, JD Edwards, Siebel Systems and other companies.
"As the economy gets more and more difficult, companies focus more and more on core processes," said Conway, who added that PeopleSoft's products can help companies cut costs.
Robertson Stephens analyst Eric Upin named "productivity-enhancing applications" as a strong point for the company's second quarter in a July 25 research note. What's more, "customers are more likely to buy software from more established companies with broad, integrated solutions," in an economic downturn, where smaller companies are likelier to fail, Upin said.
PeopleSoft 8--the company's new customer relationship management (CRM) platform, has been a hit by most measures, analysts say. By pouring 28 percent of its budget into research and development--an enormous number compared with the 10 percent average spent by most software companies--PeopleSoft created an easy to use product that operates over the Web.
In fact, PeopleSoft is expected to announce a $10 million contract this week with the Internal Revenue Service, which plans to use the company's PeopleSoft 8 suite of CRM software to improve its customer-relationship processes. The contract is significant for PeopleSoft, which has lagged behind rivals such as SAP and Siebel Systems in the front-office software market. The IRS said it will implement the software in phases over the next few years.
Analysts have touted the software in their praise of the company's most recent quarter.
"The upside in execution is related to the company's strong product architecture," said Goldman Sachs analyst Thomas Berquist, who raised his estimates for 2001 following the company's second-quarter report.
The company moved into the customer-relations field with its acquisition of Vantive in December 1999. What it did with the existing software and customers is a tribute to Conway's management flair, said Bill Parry, the chief technology officer of Alta Resources, a Vantive customer adopted by PeopleSoft.
"The thing PeopleSoft brought to Vantive was a far more robust view of the customer. Vantive had a view that was more marketing and sales related," said Parry, whose company helps businesses implement customer service applications. Parry said he's seen a definite change in the quality of the company's products since Conway took the helm.
Conway said he's satisfied that PeopleSoft 8 can fend off competition from Oracle and Siebel and is now bringing R&D spending back to around 15 percent of the company's budget.
But Conway added that he isn't about to revel as analysts praise the company for being in the right place at the right time with the right product, considering that not so long ago, he experienced the reverse.
The perfect storm
Conway's two years at the helm of PeopleSoft has been barely enough time to turn around its problems. He said even with his experience--he was president and CEO of OneTouch Systems and spent eight years as an executive vice president in a variety of areas at Oracle--he had never seen problems like the ones at PeopleSoft.
"When I came to the company it faced a perfect storm," said Conway, referring to the phenomenon where three weather fronts converge to wreak havoc.
Storm front No. 1
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see commentaryThe second blow came from the departure of the company's founder and CEO Dave Duffield, who retired after pioneering a unique corporate culture that attracted loyal employees. "He was the anti-Larry Ellison," Conway said. "He stood for goodness and light and had the demeanor of Jimmy Stewart." Though Duffield remains as chairman of the board, Conway felt his departure made employees all the more likely to leave, especially considering it was a time when people were getting "enough stock options to buy a small island" from labor-hungry competitors, he said.
The third problem was loose financial controls that hurt the company as it grew. "They just hadn't kept up with growth," said Conway, who described a mess of pay scales, succession planning, management guidelines and guidance concepts. The concepts "were not only behind the times, some were nonexistent," he said.
Two years have passed, and the company has finally rectified many of the problems. While some things, like a budget, were implemented right away, it took 12 to 18 months to get other changes up and running.
But Conway said his most difficult challenge was instilling financial discipline at the company without damaging the culture needed to create strong products. "It's like straightening teeth--you have to apply constant pressure over time," said Conway, who was afraid employees would balk at change, feeling that a bean counter was running the company.
Keeping the edge
Conway's financial diligence and psychological tactics seem to be paying off. He's not worried about losing employees anymore, especially in the current environment. Financial performance isn't much of a problem either, as most analysts agree the company is on track to meet raised earnings estimates of 60 cents a share for fiscal 2001.
"We believe PeopleSoft's business is tracking well," said U.S. Bancorp Piper Jaffray's Jon Ekoniak. Based on recent meetings with management, the analyst said the company could top his estimate for earnings of 18 cents a share by a couple pennies in the fourth quarter. It could also top his estimate for earnings of 83 cents a share in fiscal 2002 by as much as 14 cents, Ekoniak said.
Goldman Sachs also lauded the company's performance since its last quarterly report, largely based on a one-year licensing agreement with the Defense Department. The deal, which PeopleSoft beat out Oracle and Seibel to get, "could provide upside in 2002 and beyond," analyst Thomas Berquist said.
Though things are going well, Conway said he still isn't content. PeopleSoft has to keep innovating while keeping customers happy. He requires his sales staff to call every lead back within 72 hours and then follow up once deals close to make sure customers are satisfied.
"I don't want to be one of the companies that fell from grace," Conway said. "Besides, we've already been there."
Staff writer Erich Luening contributed to this report.