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PeopleSoft facing growing pains

PeopleSoft's stock lost some ground on Wall Street, even though the company's profits soared and license fees grew more than sevenfold in the fourth quarter.

PeopleSoft's (PSFT) stock lost some ground on Wall Street today, even though the company's profits soared and license fees grew more than sevenfold in the fourth quarter alone.

In a report released after the market's close yesterday, PeopleSoft said its earnings were $147.7 million for the fourth quarter ended December 31 and $450.1 million for the year. They compare with $78.2 million for the year-ago quarter and $232.1 million for all of 1995. One-time charges related to acquisitions and research and development expenses weighed down net income in 1996 to $35.9 million, or 30 cents a share. Yet the results still surpassed 1995's year end net income of $27.3 million or 24 cents a share.

Apparently, this was not good enough for Wall Street. The business applications software maker's stock lost roughly nine percent on Nasdaq today. The stock fell nearly $4.50 to close today at $45.25 a share.

Stock market analysts attributed today's dip to growing pains. They said PeopleSoft has now reached the kind of critical mass that will make it difficult to continue its stock's ascent, even though it has not taken any serious missteps. They were upbeat about PeopleSoft's 1996 performance and praised another strong final quarter for the Pleasanton, California-based software maker. The company's stock has doubled in price during the past year, mirroring rapid growth in its operations and customer base.

"They continue to kick butt and take names in the business applications business," said Robert Kugel, an analyst with the brokerage house First Albany. "PeopleSoft is one of the best managed companies in the software industry." Kugel expects the company to continue to outpace competitors and double in size over the next few years.

However, Kugel has taken the stock off his "buy" list. He said 72 percent growth in license fees in the fourth quarter, compared with the final quarter of 1995 "isn't good enough for their investors," who had become accustomed to seeing growth double each quarter for each of the last few years.

PeopleSoft said it reaped $1.7 million in net income for the fourth quarter, or 1 cent a share, after taking $29.4 million in one-time charges related to the company's October acquisition of Red Pepper Software, the purchase of another software firm, PMI, and research and development costs.

Without the charges, PeopleSoft said it would have posted $20.5 million in net income, or 17 cents a share, for its fourth quarter ended December 31, compared with $11 million in income and 9 cents a share for the year-ago period.

"The numbers were generally better than I was expecting," said James C. Mendelson, an analyst with SoundView Financial Group.

Beyond the much-publicized Red Pepper acquisition, PeopleSoft also took several measures last year to seek a prominent position against competitors like SAP, Oracle and Baan in the multibillion dollar business applications marketplace.

Last fall, PeopleSoft released version 6 of its applications suite of financial and human resources software and stepped up efforts to Internet-enable some products. The company has also embarked on partnerships with Intrepid Systems, in a bid to better penetrate the retail industry, and Vantive to integrate its manufacturing software with that company's mobile user software.

Mendelson said PeopleSoft's results partially reflect booming sales in the business applications marketplace. He said last week's earnings by SAP also reflected opportunity in this marketplace.

Last week, SAP reported revenue growth of 38 percent, posting $2.39 billion in sales for the year ended December 31. For the same period, net profit grew fourfold to $365 million and per share earnings reached $3.52, a 37 percent hike

Mendelson cautioned that business applications spending may plummet as corporate executives turn their attention and information technology budgets to updating legacy systems in anticipation of the year 2000.

"As we approach the year 2000, many companies may deflect resources simply to buy custom software that will assure that data will continue to be accessible after the clock strikes midnight on the January 1, 2000," he said.