PeopleSoft makes money the old-fashioned way: by selling software licenses and consulting services. So much so that net income in the last quarter was $36 million. A small but increasingly important driver of these core businesses is software as a service from PeopleSofts eCenter unit and its third-party application service provider partners.
“Total revenue driven by ASP as a channel is going to be an increasing part of the revenue base,” said Deepak Gupta, eCenter general manager at PeopleSoft.
Thirty percent or more of license revenue could eventually be driven by application services if eCenter and PeopleSofts ASP channel partners can deliver a high quality of service, Gupta said. ECenter added 10 new customers in the quarter ended March 31, out of a total of 130 new PeopleSoft customers for the period. “My plan for this quarter looks better,” he said.
Recurring revenue from hosting and management services should grow over time, and eCenter is expected to break even in the not-too-distant future. But the real payoff is anticipated from the two traditional revenue streams.
“ECenter makes sense as a strategic fit in our overall operations,” said Kevin Parker, PeopleSofts chief financial officer. “[Application services] isnt an end unto itself, because its not that terrific a business from the P&L [profit and loss] point of view. In the larger context, the license and consulting revenue we can generate from our ASP customers is good.”
PeopleSoft has no plans to tamper with its successful formula by offering its software services on a rental or usage basis. “We will stick with the licensing model for the foreseeable future,” Parker said.
ECenter and third-party ASPs are best understood as a distribution channel, Gupta said.
“We offer two delivery options after license sales, and we dont push one over the other,” he said. “The sales force makes money either way.” Customers want low up-front costs and predictable expenses, which PeopleSoft provides by financing licenses, he said.
So far at least, customers have not shown much interest in the “pure” ASP model of rental software.
“If you can, you buy it,” said Gene Johanson, ASP project leader at Frank Russell, a financial services firm that uses human resources applications from eCenter to support more than 1,400 employees. “Flexibility is everything. If you own the license, you always have options.”
One of eCenters recent license sales was for more than $1 million, and work is under way for a Fortune 100 customer, but the focus is largely on expanding PeopleSofts presence among midmarket companies.
“Its important because it removes some of the objections of companies with less than $500 million in revenue,” Parker said.
Beyond the lower infrastructure costs at the customer end promised by any ASP, PeopleSofts expertise in its own software makes eCenter a strong competitor on price and service for third-party ASPs.
According to Johanson, PeopleSoft was the low-cost provider of the five ASPs that his company considered. “They were half as much as the next cheapest, and 10 times less than the highest,” he said. “If a customer knows its own environment, the move to ASP can be low-cost and done in a short timeframe.”
PeopleSofts partnering strategy will focus on vertical markets, Gupta said, and on customers that want a multivendor application package, which eCenter does not support.
ECenter also has the potential to help PeopleSofts crucial professional services business, which accounted for $319 million, or 63 percent of last quarters total revenue of $503 million, driven largely by work related to the release of PeopleSoft 8.
Web-native PeopleSoft 8 is a natural for hosting, but still requires its share of customization for individual customers, thus providing work for PeopleSofts army of consultants, who also provide ongoing maintenance and upgrades. ” One size fits all doesnt work for our applications,” Parker said. “ASP is certainly a revenue driver for professional services.”
Close cooperation between PeopleSoft consultants and eCenter managers is a plus, Johanson said.
Gupta hopes the resulting comfort level will make it easier for customers to choose additional ASP services in the future, a potentially important contributor to eCenters growth.
“A happy customer is a much easier sell,” he said.