PeopleSoft Cleverly Clears a Bar
PeopleSoft today pre-announced a quarter that
was far better than analysts (including
this one) expected. License revenues are
expected to be above $100 million, up
from $70 million last quarter.
I hate being wrong, but I'm happy for the people at PeopleSoft,
who deserve considerable respect for an extraordinary achievement.
(Kudos, too, for announcing within 36 hours of the quarter's close.
Whose software do they use?)
How It Was Done
At least four factors seem to have been
at work here. First, is the fact that
the bar was set low. At the last
earnings report, several analysts
remarked on how conservative 2nd quarter
guidance was. We now know that the JDE merger
was in the works. Did prudence about the market
impact of that announcement turn out very
well indeed? Perhaps so.
Second, customers were willing to thumb their nose at the risk
they were incurring and at analysts (like me) who told them they
were incurring the risk. Perhaps they didn't like Oracle; perhaps
they didn't believe the takeover would happen; or perhaps they didn't
want further delay in the procuremet process. Whatever the reason,
they voted for PeopleSoft with their checkbooks.
Third, PeopleSoft cleverly offered customers
a customer protection plan, which provides
for a payment of between 2 and 6 times the license
fee in the event that new management stops supporting
the product and developing new software for it.
This "customer poison pill" might or might
not have holes (I'm sure it does), but it
apparently provided reassurance.
Fourth, there may simply be an uptick in demand for enterprise
applications. If so--and both Kevin Parker and Craig Conway mentioned
the possiblity with bated breath--this may be the most significant
news coming out of the announcement. SAP, too, is seeing an uptick
this quarter, which I've been assigning to safe-havenitis, but perhaps
it isn't. As many analysts have said, there has been a long period
of digestion for all the Year 2000 software purchases. Were they
right? Are customers getting hungry again.
What This Means for the Merger
At the very least, this event hurts
Oracle's chances. I can't speak for
Larry, but I tend to fold when
I don't have exactly the hand want, and I'd be
in a folding mood.
Oracle's basic argument to the institutional
investors who will make or break this deal is
that PeopleSoft is a badly run company that
is wasting their resources on feeding their
CEO's ambition to be number two.
What does this event do to that argument? Well at the very least,
you have to change the word "badly" to "well." PeopleSoft clearly
has responded resourcefully. "As Chuck Phillips makes the rounds
to all the institutional investors," said one financial analyst,
"PeopleSoft is there the next day." The cost of fighting the merger
has exceeded $10 million, according to the call; at least it seems
effectively spent.
If these deals were done on a rational basis, I'm not sure that
the results should make much difference. A meaningful judgement
about PSFT's ability to make its numbers ought now to include JDE's
revenue. If that tanks (and it clearly is in PeopleSoft's interest
to keep it down this quarter if the deal does go through), then
the post-merger PSFT starts looking problematic.
In committing himself even more loudly to making this deal work,
moreover, Conway is writing a lot of checks that will need to be
cashed. A rational investor would worry about these. In my view,
the biggest and most rubbery check is the current plan for JD Edwards,
which seems unworkable. Either I'm wrong (clearly a possibility),
or every day and every dollar that PeopleSoft spends on trying to
make that plan work is another proof point for Larry's basic proposition.
There are other plans for JD Edwards that could work very, very
well, but adopting them now involves bouncing other checks, most
notably those promises to JD Edwards customers. Admittedly, they
are not a very important constituency, and nobody prosecutes you
if the promises are broken. But still.
If the plan does prove unworkable, then what happens? Well, it
will look very much like what Oracle is planning to do with PeopleSoft.
JD Edwards will be eviscerated and customers will be asked to convert
to the PeopleSoft platform. If that happens, we will look back on
this and see this battle as primarily won by rhetoric. Larry's harsh
and honest rhetoric will have lost out to a passionate conviction
that came across as plausible.
Not that this is necessarily a loss for Larry. If Larry ends his
bid, he'll have a lot of egg to wipe off his face, but he'll also
have a lot of cash. If he is right or I am right (unlikely, we admit)
and if the market doesn't turn, a year from now, PeopleSoft will
be struggling, plus he will have had a year to study rhetoric.
The Long Term
As I said, the most significant part of this announcement may be
that at long last, we're seeing customers who want to buy. If that
happens, everything will get easier for the software companies.
Those of us who, like me--and who
believes me these days?--think that
the economics are problematic for an enterprise
application business that is gradually
being commoditized will have to suspend
our pessimism for a while or figure out
another mantra to recite.
As far as I'm concerned, the same
problems that underlay much of the first
downturn still remain. It costs too
much to develop this software and too much
to put it in. The underlying model that it uses
(4GL transaction processing) isn't powerful
enough. And the requirement that an
innovation company grow quickly makes
the costs of running such a company very high.
Consolidation of the kind that Conway is proposing
doesn't do very much about any of these issues,
and consolidation of the kind that Ellison is proposing
does something about the latter issue (possibly), but
only at a significant cost to customers.
If we could see some movement in the industry
that solves some of these problems in a way
that benefits everybody, that would be what I
am looking for. In the meantime, let's just
hope that I'm wrong (again)
and Conway can make it work.
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