Reaching Out

PeopleSoftss Net-enabled software strategy rides growth curve

Sometimes its not the numbers that count but the way you count them that makes the difference.

Take PeopleSoft. The company had good news in late January when it reviewed its fourth-quarter earnings for analysts. Sales were $498 million, up 34 percent from the year before. Software sales, valued more than training or consulting fees, rose 73 percent to $165 million. The numbers meant the company generally outdid its peers in the enterprise software industry, which grew 7 percent last year to $19.6 billion from $18.3 billion.

"The pipeline looks good and we see healthy growth in all product lines," said Craig Conway, PeopleSofts president and chief executive, in a conference call with analysts.

But investors promptly let the stock fall 14 percent after Morgan Stanley Dean Witter downgraded it. To Wall Street, the prospect of slowing software sales and PeopleSofts reliance on consulting fees outweighed the quarterly numbers.

It was the latest round of ups and downs for PeopleSoft, a Wall Street favorite in the 1990s that had soared to $54.94 per share in April 1998, only to plummet to $13 a year later. It came back with the help of new management, a new technology direction and a revival in the market for Enterprise Resource Planning software — software that centralizes control of scattered information technology across a company.

Now its challenge is to find a lasting advantage with its technology, which analysts acknowledge puts it ahead of its rivals. But the company still hasnt charmed investors. "The key thing is staying ahead and gaining market share," says Chief Technology Officer Rick Bergquist.

Get Ahead and Stay Ahead

But technological coups and bold decisions dont keep companies ahead on Internet time. "The challenge is to do all these architectural changes fast enough so they dont become obsolete," says David Dobrin, an analyst at Surgency.

PeopleSoft became the second-best performer on the Standard & Poors 500 Index from 1993 to 1997, returning 2,109 percent growth. Starting out in human resource and financial software, the company developed a loyal following among users and investors. But stale products and customers waiting for the uncertainty of year 2000 issues to pass caused a sales slump starting in 1998.

In 1999, PeopleSoft founder Dave Duffield decided he couldnt turn around the company himself, so he hired Craig Conway from rival Oracle as CEO. Conway replaced two-thirds of the top managers and consolidated product development around an Internet strategy. PeopleSoft 8, the latest version of the application suite, would be Internet-enabled, running off a Web server and reaching outside the enterprise instead of the inwardly focused, client-server technology on which PeopleSoft had banked.

This might seem like an obvious move today, as software vendors scramble to move to the Internet. But the future was less clear in 1998. PeopleSoft bet $500 million — 27 percent of its revenue — that the Internet architecture would become compelling, Bergquist says.

In all, it converted 108 of its products to the Internet architecture and introduced 59 products. Its user interface looks and feels more like the Web site of Yahoo!, laced with HyperText Markup Language hyperlinks, than the Windows desktop dotted with hieroglyphic icons. The approach reduces training and software costs and makes it easier and more intuitive for users, Bergquist says.

"They bet the ranch a little over a year and a half ago, but they really have a product that is suited to what the marketplace wants," says John Hagerty at AMR Research. "I think it gives them an advantage because a lot of buying decisions are based around a gut feel of ease of use."

U.S. Bancorp Piper Jaffrays Jon Ekoniak agrees, saying competitors are behind. "SAPs not there yet. Oracle is close."

PeopleSoft says it has sold more than 1,000 of the new suites, which were released last fall. Still, analysts say its too early to tell if the software is a hit. Only a small number are installed, and analysts are waiting to see if PeopleSoft can sustain its momentum and enter new geographic and industry markets — something it has struggled with in the past. "They have made mistakes," Dobrin says, noting that the company hasnt met its ambitions to go global.

PeopleSoft says it has won several deals against competitors and makes about one-quarter of its sales outside the U.S.

Another change was its acquisition of Vantive. It integrated Vantives software for managing customer relations into the PeopleSoft suite.

The economic climate has helped, too. While its Internet architecture has aided sales, PeopleSoft has also benefited from renewed demand for enterprise software. "We are seeing a bit of a resurgence there," Ekoniak says. Lawson, Oracle and SAP are also reporting signs of growth.

Why? As companies add software that reaches outside to run the supply chains, collaboration with trading partners and customer relations, they need a way to tie everything together. Thats what enterprise software does. "Having the ability to be more nimble requires more nimble back-office systems," says Yankee Group analyst Greg Runyan.

PeopleSoft has shown it can be nimble, too, but analysts still want to see how the company threads new obstacle courses. "We wont know for at least a year," Dobrin says.