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PeopleSoft stands tall amid slowdown

The software maker reports a strong second quarter and is upbeat about full-year results, but analysts say the company is showing signs of damage from the economy.

PeopleSoft reported a strong second quarter and said full-year results could be up slightly. Analysts were pleasantly surprised by the results but said the company was showing signs of economic damage.

Shares in the software maker were up $2.01 to $36.25. Competitors Oracle and Siebel Systems had to lower their forecasts for growth in 2001, but PeopleSoft actually revised its numbers upward.

Although competitors bemoaned declining results, PeopleSoft topped earnings estimates and reported its highest revenue yet. Revenue increased 27 percent from last year's second quarter to $533 million. Earnings were $46 million, or 14 cents a share, up from 6 cents a share in last year's second quarter--well above First Call's estimate for 12 cents a share.

The company cited continued market demand for its collaborative enterprise software, which boosted license revenue up 51 percent from the second quarter of last year to $166 million. Service revenue rose 20 percent from the same quarter of last year to $337 million.

Including nonrecurring items, earnings were $47 million, or 15 cents a share. Items included a favorable after-tax adjustment of $2.6 million and an after-tax charge of $1.1 million related to an acquisition.

PeopleSoft also said earnings for the full year are expected to be at the high end of the range of 55 cents to 60 cents per share, and third-quarter earnings should be around 15 cents a share, up marginally from the second quarter

Analysts were pleased by the results and upped their estimates.

"PeopleSoft executed even better than we expected in what has been a very difficult quarter for software," Goldman Sachs analyst Thomas Berquist wrote in a research note.

The analyst raised estimates for fiscal 2001 and said his 2002 numbers are "likely low." He maintained a "recommended list" rating on the stock and gave it a new 12-month price target of $50.

The deferred revenue factor
Analysts said strength was largely a result of the company's cost-cutting measures and of its PeopleSoft 8 customer-relationship management software, which boosted license revenue growth. But they also cautioned that the company benefited from a pool of deferred revenue, which could be drying up.

Dresdner Kleinwort Wasserstein analyst Sanjiv Hingorani maintained his "hold" rating and warned that the company's reserve of deferred revenue is likely to be depleted over the next two or three quarters. Had it not been for the deferred revenue this quarter, PeopleSoft's revenue would have been $153.1 million, below his estimate for $159 million.

Blair William analyst Laura Lederman also expressed concern about the company's ability to keep growing given the economy.

"Despite the very strong results PeopleSoft posted this quarter, the company is being affected by the economy," Lederman wrote. She noted that sales cycles have lengthened and the number of deals actually closing has dropped. The company's European business, which accounts for 39 percent of license revenue, also slowed but was offset by better-than-expected demand in the United States.

Strength in the number of orders, especially in the company's customer-relationship management software, should continue to offset weakness in Europe, the analyst concluded. She maintained a "buy" rating.