甲骨文 (ORCL) 2001 Q2 法說會逐字稿

PEOPLESOFT INCORPORATED SECOND QUARTER EARNINGS CONFERENCE CALL

Good afternoon, and welcome to the PeopleSoft second quarter earnings conference call. Replays of this conference call will be available for seven days following the call, by dialing 1800-964-45-72. There is no pass code needed for the replay. Again that number is 1800-964-45-72. I'd now like to turn the call over to PeopleSoft's Vice-President of Investor relations David Sankaran, and sir, you may begin.

Thank-you. Good afternoon and welcome to PeopleSoft's second quarter earnings conference call. Joining me today is Craig Conway, our President and CEO, and Kevin Parker, PeopleSoft's Chief Financial Officer. During this call, we will review PeopleSoft's results of operations for the second quarter and provide an overview of current market conditions. We will also share some of our expectations for PeopleSoft's future financial performance. After our commentary, we will open up the conference call for questions. Please remember, our discussions of quarterly results and our business outlook may contain forward-looking statements. A particular forward-looking statement and other statements that may be made on this conference call that are no historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. These specific forward-looking statements may relate to such matters as future customer demands, competitive landscape, including our [________________] as competitors, new product development status, position of the eBusiness software application sector, and future financial performance or expectations; including revenue, operating margins, and earnings expectations. Please refer to the company's current earnings press release, our annual report on Form 10-K, and our quarterly filings on Form 10-Q for more information on some of the risk factors that could cause actual results to differ. Please remember, the company undertakes no obligations to update any information presented in this discussion. Now let me turn the call over to Craig.

Good afternoon everybody. This was a remarkable quarter for PeopleSoft and one of the most challenging economic environments in the past 20 years. PeopleSoft was able to achieve record financial results. The company achieved total revenue of $533 million, an increase of 27% over the prior year. That's the highest total revenue in the company's history. Net income increased to $46 million, an increase of 188% over the prior year. Total cash and cash investments were $1.4 billion, an increase of $247 million in a single quarter. That again was the highest cash balance in the company's history. We experienced positive cash flow from operations of $152 million which again was the highest in the company's history. And finally, DSO decreased to 68 days from 77 days during the quarter, a 9-day reduction in a single quarter, the lowest DSO in the company's history. Truly, we are very pleased with PeopleSoft's financial performance in Q2. The company continues to gain share in the enterprise application market; our PS8 Internet architecture is widely regarded as superior to our competitors. We are growing in our traditional product categories of human resource management and financial management, at the same time we are also growing in newer product categories such as customer relationship management and supply chain management. Frankly in Q2, PeopleSoft did better than we expected, but it wasn't easier than we expected. In fact, the macroeconomic environment is becoming more difficult, not less difficult. Nevertheless, we continue to believe that the outlook for PeopleSoft is very bright indeed.

I am going to turn the call over to Kevin Parker, PeopleSoft's Chief Financial Officer for more financial details on the quarter but then I am going to come back and comment on the business climate, our experiences during the last quarter, and our expectations for the second half of the year. Kevin.

Thanks Craig. As Craig announced total revenues for the second quarter of 2001, reached a record of $533 million. This represents an increase of 27% over the same quarter last year and 6% growth over Q1 2001. This is the fifth consecutive quarter of record quarterly revenue for PeopleSoft. License revenues in Q2 were $166 million, an increase of 51% over the same quarter last year. In reviewing the geographic split of our license revenues, we continue to see worldwide acceptance of PeopleSoft 8 with approximately 39% of our license revenue generated internationally during the quarter. Year-over-year license revenue growth was 48% in the US and 57% internationally. Using constant foreign currency exchange rates, the international growth rate would have been nearly 70%. During the quarter, we won a number of large deals including 24 Hour Fitness, AT&T Wireless Services, Credit Suisse, Dana-Farber Cancer Institute, the US Department of Defense, France Telecom, Hewlett Packard, Morgan Stanley Dean Witter, Nextel, Pricewaterhouse Coopers, Ross Stores, Siemens Business Services, TD Waterhouse Group, Tiffany & Company, and Waste Management. During the quarter, we signed 29 deals in excess of $1 million and our average new deal size exceeded $600,000. We also added 120 new customers during the quarter. New customers accounted for 35% of our license revenue, a slight decrease from 37% in Q1. Notably, since the launch of PeopleSoft in September 2000, we have added over 500 new customers. As of today, we have over 160 customers live on PeopleSoft 8, and there are more than 1000 implementations underway.

Q2 service revenues of $337 million increased 20% from the same quarter last year and 6% sequentially. The major components for service revenue, maintenance revenue, and consulting revenue increased sequentially and year-over-year. Reviewing our cost and expenses, our total expenses grew at a much slower year-over-year rate than total revenue. We have continued our focus on profitably growing our business. As we have described before, our hirings, since last summer, has been focused primarily on revenue generating headcount, sales reps, and billable consultants. We continue to keep a close eye on our expenses as well as our headcount growth. The clearest way to see this is in the expansion of our operating profit margin which nearly tripled from Q2 of 2000, to 10.7% during the quarter. Let me hit the components of our cost, in Q2 gross margins on license revenue of 89% and gross margin on services of 45% were both essentially unchanged from Q1. During Q2, our sales and marketing expenses increased to $131 million from $112 million in the second quarter of 2000. The increase is due to our continuing investment in expanding our marketing activities, and the addition of new sales reps to leverage the PeopleSoft 8 opportunity. During the past year, we increased the number of direct sales reps by over 60%. Q2 sales and marketing expenses were 25% of total revenues. This percentage is down from 27% in Q2 of 2000, and is unchanged from Q1 of this year. Product development expenses, including the cost of development services, were $100 million, a decrease of 10% from the same quarter last year and 6% sequentially.

As a percentage of revenue, product development expenses, including the cost of development services, declined to 19% of revenue from 26% in the second quarter of 2000, and from 21% in the first quarter of 2001. As we have discussed on several occasions, we expect product development expenses as a percentages of revenue to decline over the next several quarters ultimately reaching 15%. G&A expenses were $42 million for the quarter. G&A as a percentage of revenue was 7.8%, up from 6.7% in Q1. Two primary factors were behind the increase, first, we recorded additional expenses for nonproduct related litigation. I want to be very clear, contrary to recent rumors, these charges were for historical nonproduct related legal matters. The second factor impacting G&A expenses relates to the investments we are making in improving our worldwide systems and processes to support our expected future growth. We are upgrading to the PeopleSoft 8 eBusiness applications for each major business process area financials, supply chain, human resources, CRM, and analytics. We are live on PeopleSoft's HR, and we will be live on CRM next week. The remaining systems will be live in the coming months. Other income, which consists primarily of interest income, increased 60% over the prior year to $13 million. The increase is attributable to higher interest earned resulting from our higher cash and investment balances partially offset by lower interest rates. Looking at profitability, we made significant improvements during the quarter. Operating income from our current operations increased year-over-year by 253% to $57 million. Operating margin from our recurring operations as a percentage of revenues was 10.7%, up from 3.8% in Q2 of 2000.

Net income from recurring operations increased year-over-year by a 188% to $46 million. Finally, earnings per share from recurring operations came in at 14 cents, 2 cents better than Wall Street's consensus estimate and up from 6 cents in Q2 of 2000. Reported earnings per share including $1.5 million favorable after tax impact, from two nonrecurring acquisition related items was 15 cents. Focusing on our balance sheets, significant highlights for the quarter include cash and investments increasing by $247 million during the quarter to $1.4 billion at June 30th. This reflects our continuing focus on maintaining a very solid cash flow and strong balance sheet. In fact, during the past 12 months, our cash and investment balances grew by over $600 million, a 76% increase. Cash flow from operations of $152 million during the quarter, up 168% sequentially. DSO declined to a record low of 68 days at the end of the second quarter. This is significant improvement from 77 days last quarter. I'd like to point out that these results do not include any factoring. We have not factored any receivables since last year, and we do not intend to factor anything in the future. We are very pleased with our focus on collections that has driven DSO down to best in class levels. Going forward, we continue to expect DSO to remain in our target range of 70 to 80 days. Total deferred revenues increased in Q2 by 1% from the prior quarter to $523 million. As we discussed in our last conference call, deferred license revenue declined by $13 million during the quarter to $26 million at June 30th. This decrease is consistent with our focus on maintaining business practices that result in current period revenue recognition.

As a result of this focus, deferred license revenues may continue to decrease slightly going forward. As Craig stated earlier in the call, we are very pleased with our continued strong performance during a very tough macroeconomic period. We remain very concerned with these current global economic conditions. As we look forward, we do not expect these conditions to change in the near term. However, our pipeline continues to grow substantially and our execution remains strong. Taking all of these factors into account, for Q3, we expect to increase both license revenue and EPS sequentially, and we expect to come in slightly ahead of the current Wall Street consensus estimates, specifically we're expecting Q3 license revenue to be in the range of $165 million to $170 million. We also expect Q3 earnings per share to increase sequentially by one penny to 15 cents per share. For Q4, we remain comfortable with the consensus estimates. For the full year, we now expect license revenues to slightly exceed our previous guidance of 35% year-over-year growth, and we now expect earnings per share to be at the high end of our previous range of 55 cents to 60 cents. Let me turn the call back to Craig for additional comments about our results and future expectations. Craig?

Thank-you Kevin. Three months ago, on the Q1 earnings call, I said the macroeconomic environment was very difficult, particularly in United States. Spending was being curtailed in all categories including IT. Approval cycles were longer and required more justification for return on investment and discounting pressure was high in that type of market. I said at that time that PeopleSoft was not immune from the effects of the market. I did not see that market improving, and in that respect, I think, on both accounts, I was right. The market did not improve in the past 3 months. In fact, as Kevin mentioned, those conditions that I described at the end of Q1 have now spread to the international markets. Europe, Latin America, and Asia-Pacific, all showed signs of slowing, and in fact, PeopleSoft was not immune. Our overall conversion rate in Q2 actually decreased. We may have actually done better in Q2, but the rate of closing deals in the pipeline decreased. But despite the macroeconomic environment, that has now impacted the international markets and the decrease in the rate of closing deals in the pipeline, PeopleSoft continues to still be able to post record quarters. Why? One answer is simply that the increase in our pipeline is higher than the decrease in the closure rate. In other words, the interest in PeopleSoft's Enterprise Software is growing faster and the conversion rate is slowing down, and it's the rapid growth of the pipeline that continues to give us confidence, not only in the short term but is, in fact, very exciting to us in the long term. Second reason is that our win rate against competition is very high right now. The PeopleSoft 8 product line is simply very strong in competitive evaluations.

Overall, we feel that PeopleSoft is uniquely positioned even in this difficult market. In fact, in a difficult market, companies were particularly concerned with increasing productivity and reducing cost, and by moving enterprise applications to the Internet, it has been estimated by various research firms that companies can save up to 90% on implementation and administration, and by moving enterprise applications to the Internet, it allows collaboration between customer systems, supply chain systems, and human capital management systems, and that represent an enormous increase in productivity. So, every company today seems to want to build a collaborative enterprise, and as they investigate how to do that, they discover three things. One, that PeopleSoft has a technology architecturally, with many large customers live and in full production on PeopleSoft 8 including WalMart with 980,000 employees live on the PeopleSoft 8 HR system, and Credit Suisse First Boston, with the PeopleSoft 8 global financial system live around the world, right now. The second thing companies discover is that PeopleSoft has a best of breed product line not only of customer relationship management but of supply chain management, financial management, and human resource management software that is also fully integrated. The third thing companies discover is that PeopleSoft enjoys a high level of customer satisfaction and reference ability. We're known as a trustworthy partner. The latest example of that is today's announcement of a global alliance with IBM, integrating WebSphere into the entire PeopleSoft product line. So, that's why we're really affirming guidance for the remainder of the year despite a challenging market. Now, as Kevin mentioned, that's not to say we believe it's going to be easy, we don't, we're cautious, in fact, we're more than cautious. We would continue to take additional steps to manage expenses to help us achieve our financial goals.

At the same time, we continue to invest in certain growth factors and growth drivers, including customer relationship management where we recently released a product we feel is the best in the industry, and that is being reviewed very highly by customers and analysts alike. In the end, I'd say, I've never felt more confident about PeopleSoft's product line, our management team, and our position in the marketplace. I believe we will continue to execute well, and as I said, more than 2 years ago, when I joined the company, I do believe PeopleSoft's best days are still yet to come. At this time, I would like to move to the question and answer portion of the call. Operator, if you could please begin the polling.

Thank you, and at this time, if you would like to ask a question, please press '*' and then '1' on your touch-tone phone. At this time, please press '*' '1' on your touch-tone phone. Our first question comes from Tom Berquist, and sir, your line is open. Please state you company name.

Goldman Sachs. Great quarter guys. If you look at the time of the competitive landscape in light of all those factors that you have been looking at, it does appear that we're seeing a little bit of a swing back towards some of the larger package app vendors and that coupled with the other architectural changes that you alluded to does seem to reward, kind of, a different set of vendors that has been rewarded over the last year. Is that your sense? And if that's the case, can you talk about the competitors you see most often?

Tom, I do think that's the case. I think particularly in this market, companies are preoccupied with productivity and expense management and as companies look at their large IT enterprise systems, they are attracted to the proposition of putting them on the Internet, because putting them on the Internet will reduce cost up to 90%, and it simply doesn't cost very as much to implement a enterprise wide implementation if all the code is on the various servers, and it is not on any clients. So, I think that reduces cost and it does play to company's interest in increasing productivity, because when you get all the enterprise applications running on the Internet with an XML architecture, you can have collaboration between customer management systems and supply chain management systems and supply chain management systems and financial management systems and human resource management systems. So, I think in this market in particular, the value proposition has shifted probably back to an interest in productivity and reducing cost. I think that in a relatively competitive landscape, I feel that the vendors that are playing to that interest are PeopleSoft, and I think we are perceived as thought leaders in that category and architecture leaders in that category, and probably SAP, who as well as seems to be able to achieve growth in this market. I think that the smaller a company and the more isolated they are in their product line, in other words, the more they are a small part of a collaborative enterprise instead of a multiproduct line company, I think, the more difficult it is. So, I think best of breed providers are having a more difficult time than the suite providers right now.

Great. Thanks.

Thank you, and our next question comes from Neil Herman. Sir, your line is open. Please state your company name.

Lehman Brothers. Congratulations. Your capital I saw for the quarter was up a bit, I presume that's associated with the SkillsVillage acquisition, could you walk us through that, and then, secondarily, on the competitive environment, could you just talk a little bit about what you're seeing competitively from Oracle, SAP, and it seems Siebel these days is announcing some of your CRM deals on their calls. Could you just talk a little bit more in depth about some of the deals you've won specifically in that space, and how are you competing there?

In terms of this SkillsVillage acquisition Neil, I think, I'm not sure of the details behind the question that was accounted for as a purchase, and it was closed during the course of quarter. We had an IP R&D write-off that was part of a nonrecurring charges we spoke of during the course of the prepared text. I'm not sure what the specifics of the question are that you're asking.

Yes, your caps offer increased from 6.5 to 15 million in the quarter. I was just wondering would it.........

That is the intangible assets associated with the SkillsVillage acquisition, you're correct.

Okay, great.

On the competitive front, I tend to think all of our major competitors are pretty good companies Oracle, SAP, and Siebel, I think our competitive win rate against Oracle and SAP has never been higher. I think that's related to product in architectural lead, and I think we're able to capitalize on that by recruiting better and better people, and I think what's coming along with that is better and better executions. So, I think we've got a bit of a symbiotic effect going that is now swinging the momentum in our direction. So, I think our win rate is probably better than it has been. You know Siebel is also a very, very strong company and it's led by a very high integrity guy, and Tom mentioned on his call, not on this call but the one before, some of the deals that PeopleSoft has won on the customer relationship management area. We have, you know, some of those customers we are working press releases around in various marketing programs around to try to draw visibility to them but some are more visible others weren't were announced by Tom in our prior call. There is one thing that I think that has been said in these competitive situations is that PeopleSoft has been winning them by discounting heavily, and that's just not the case. I don't know whether Tom is not being given the correct information by our sales organization a lot, but if you speak to some of those companies, they will confirm absolutely that they did not choose PeopleSoft because we're the lowest price offer. I think that the attraction people saw in the customer relationship management's basis is because of the architecture, the richness of functionality, and the integration of PeopleSoft enterprise software as well as other backbone software, Oracle and SAP, I think, we've got a very seamlessly integrated best of breed CRM product, and this also happens to be fully integrated with PeopleSoft apps. So, I know it's not a very specific answer, but I'm not into competitor bashing, and I would just say that our win rate seems to be probably as high as it has ever been right now.

Thank-you very much.

Thanks.

Thank you, and our next question comes from Jim Mendelson. Sir, your line is open, please state your company name.

Soundview. Could you elaborate Craig, a little bit in terms of the macro picture? You indicated that during the quarter, you certainly felt that it was getting worse. I am just curious whether or not you felt whether that was a function really of the international showing signs of slowing or whether or not you felt that in the US, it's stabilizing, or whether or not you felt that US was continuing to soften as well?

Jim, it is the former not the latter. It was international that began to soften. United States could not get worse. As a matter of fact, we actually had a very strong quarter in the US, but there was for the first time for PeopleSoft a general slowing in Europe, Latin America, and Asia-Pacific, and so, when I was referring to the global macroeconomic conditions, I think that they became more difficult mostly because international began to slow down, not because the US continued or got slower. I think the United States actually probably stabilized and got a little bit better for us.

Okay, and one last point. I know you don't break out any kind of specific revenues based on functional classifications of products, but could you give us a little more color in terms of just the relative sense of momentum around whether it's CRM versus supply chain versus ERM or however you want to describe it?

Yeah, I can give you a little bit more, I mean, we don't break it our for a number of reasons. One is that it's hard to put in things in categories anymore because they're all bleeding into each other, you know, customer relationship management is bleeding in the supply chain management and financial management, and vendor to vendor, we don't all call our modules the same thing in terms of what category they're in. The second reason we don't break it out is that the trend on all of them is stronger, and on any given quarter, one or two of them tends to be stronger than the others, but they all tend to be getting stronger. None of our product lines are showing a weakness. In Q2, human capital management or human resource management was very, very strong for us. Customer relationship management, despite the fact that we were only shipping PeopleSoft 8 CRM for two weeks in the quarter, it was actually very strong as well. Financial management was trending higher as well as supply chain management. If you look quarter to quarter, there is only something that tends to emerge a little bit faster then others, but there is no general pattern in there. I would say that human resource management and customer relationship management this quarter tended to lead the way with financial management having very strong quarter and supply chain management far behind that.

Thanks, congratulations on a good performance.

Thank you Jim.

Thank you, and our next question comes from Chuck Philips. Sir, your line is open. Please state your company name.

Morgan Stanley. Just wondering as the upgrades in the installed basis and if you look at PeopleSoft 8, I think we, kind of, presumed those aren't competitive, but do they in fact open up the decision to alternative, vendors and so, in fact, you have to recompete and you're just winning that much more or are those in fact less competitive normally?

Chuck, I would say they are less competitive to be honest with you. Although I did think about capitalizing on that to say we're beating everybody on the upgrades too, but it just wouldn't be the truth. I think the cost of an upgrade to PeopleSoft 8 is pretty modest. Actually, although it's a completely different architecture and we've got so many automated tools available, and we have done special packages with our professional service organization to effect that upgrade that it's nowhere near and is not even close to near what it would be to change a vendor. Companies can move to PeopleSoft 8 in fractions, small fractions of the cost of it would take to deploy another vendor. I think that the overall movement within that architecture has provided an opportunity in some cases to go in and win business against the competitor, but to be honest with you, I think that was just a convenient at which the customer that was tremendously upset with their current vendor just took it as an opportunity to change vendors. We've had several of those and like several, I mean, 5 or 6, but in general, I think the upgrades in our customer base are a matter of course.

And on the European slowing, are you satisfied that it's not any basic functionality on your European footprint international capabilities is there or is it demand or is it PeopleSoft 8 to come, part of the way down, not all the way there yet, in terms of functionality ruling it out yet.

Yeah. If you closed your eyes, you would think you were in the United States two quarters ago. It was a universal phenomena, it was across Europe, Latin America, and Asia Pacific, it was almost the exact percentage point against what our forecasts were. So every indication was that it was a market issue, not a product issue. The other indication is, what the sales organization says, or what the customers say, which shows you we just did not feel that we could move forward this particular quarter. So there was nothing about PeopleSoft 8 that was not playing as well internationally. If you remember Q1, we had a 90% growth internationally versus 70% growth this quarter, and I guess 70% growth is pretty damn good, but I will tell you that compared to our expectations for the last week or two of the quarter, it was a universal deceleration internationally and fortunately an acceleration in the United States at the same time.

And now the CRM product that you shipped the last two weeks of the quarter, but was enough activity going into that period, will you predict pipeline at CRM and sales force is likely to, can you shift the focus a little bit on it?

Yeah. We were surprised by the revenue we did in Q2. We did not count on a great deal of revenue on CRM, and I guess on an overall basis it wasn't an enormous amount, but it was way more than we thought we could do in 2 weeks. The really encouraging part for us was not the surprise element of revenue in Q2 related to PeopleSoft 8 CRM, it was the size of the pipeline that immediately opened up. Both domestically and internationally, we essentially moved into the fast current of evaluations, some of which are down-the-line evaluations, some of which were immediate evaluations that may have been headed towards another vendor. So I think we now have the opportunity to play in evaluations on a larger scale. I know we don't disclose the exact numbers in pipelines, but the percent increase in our CRM pipeline has been in the order of magnitude since the announcement of PeopleSoft 8 CRM, and we're at a magnitude higher than it was before.

And it was a super quarter in a very tough environment.

You're thinking straight.

Thank you, and our next question comes from Gretchen Teagarden. Ma'am your line is open, please state your company name.

Salomon Smith Barney. A couple of questions. The cost of opportunity is so large within your existing base, however historically the sales force has been organized by product, where are you in terms of transitioning the sales force to move over global account coverage model and intending them for cross selling versus the product oriented focus that they've have historically?

There's really two answers to the question, one was on the generic incentive for sales reps to cross our [_______________] and global account management. We have had an emphasis in our sales organization on one part of our product line whether it was human resources management, customer relationship management, or financial management. However, I think about a third of their compensation comes from cross selling opportunities. Now they don't try to close, they don't complete the sale on another integrate suite, but they are paid commissions, when they're able to isolate an enterprise-wide opportunity in another product category and then they bring in another PeopleSoft sales organization to pursue it. So I guess we're trying to have our cake and eat it too. We're trying to have a high level specialization by major product group, customer management, financial management, and supply management, and human resource management. At the same time, we're trying to leave a large amount of centers in terms of commission dollars and bonuses to try to cultivate interest in other PeopleSoft products. On our global account management side, we are in the process of improving our global account coverage, you know, as PeopleSoft has moved from 17% of revenue, two years ago, coming out of international market to 40% or so, now we have had to improve the way we manage global multinational accounts and so there is a new and improved distribution group dedicated to global accounts that we are hoping will make us a better company in managing global multinationals.

Great, and I know you're now in support of IBMs WebSphere application servers, did you notice an increase in demands for the IBM WebSphere platform, was that the key catalyst for you to offer to support IBM in addition to BEA?

Yes, and the demand for WebSphere is significantly emerging as a real market factor, and frankly I was surprised that companies had a strong opinion about what application server they used. To be honest with you, I guess, we all get focused so intently on what we do as being incredibly important, we may not attach this high level to other parts of the equation. I had no idea that companies would be strongly opinionated about what application server product they must have, and WebSphere has emerged as a must-have application server by many large organizations around the world. So that was certainly, going to be honestly, the driving factor in our decision to include WebSphere product. We also would include the WebLogic product. And by the way, PeopleSoft 8, I believe, is unique in providing these application server products for free. But in our product line, we pay for them, and we included them in WebLogic, but we did have very strong demands, and it's probably the right word, not even request demands around the world for the WebSphere product either in addition to as an alternative to WebLogic, so we work together with IBM.

Great, thank you.

Welcome.

Thank you, and our next question comes from Craig Wood. Sir your line is open, please state your company name.

Thank you, it's Merrill Lynch. It sounds like you're not ready to provide the specific names of some of your new CRM customers as you wait for some approvals there. Can you just provide some indication of how many units you're able to ship above and beyond the 9 or 10 beta customers that you had at the June event?

Yeah, I don't think we're going to break out that detail here this afternoon, Craig. As the information becomes ready for market in terms of the customer names and [________________], we'll talk about the components of it at that time.

Okay, and also in June you talked about the [_______________] partnership that you had set up for the CRM practice. To what extent have they been valuable in bringing some of these deals home and setting up the pipeline for the second half?

Well, that's going to be a controversial answer. I would say that all of our partners have been tremendously supportive of our new CRM offering, and these are partners that have in most cases multi billion dollar practices in PeopleSoft technology and PeopleSoft products. So to add customer relationship management to their practice was something they were very happy to do. I would describe in this standing ready to capitalize on customer interest. I think in this short a period of time, none of them are geared up and become lead generation machines for us. I would love for them to be that, but at this point, I think they are supportive, trained, staffed, and ready to capitalize on customers that show interest. I think, again to be honest, it is still thought to be our responsibility to generate the pipeline for them. Having said that, the deals that have closed, our partners have been instrumental in helping us close. They've been there to support the demonstration, the evaluations, to advise the account on the strengths and weaknesses of PeopleSoft's product versus competitor products. So, I don't think we would have got many of these deals, if we did not have a supportive systems integration relationship, and I guess, if you have to say sorry in general, happy, satisfied, extremely happy with the response you've gotten from systems integration, I'd say extremely happy at this point.

Okay, and finally Kevin with the DSO down, is that a reflection of less backend loading in the quarter or is that more around collection?

I think it's more around collections. The quarter was no more backend loaded than we saw Q1 or perhaps Q4 of last year. We just put a significant effort on collections and the efforts were paying off.

Okay, thanks very much.

Thank-you, and our next question comes from Jim Pickrel, and Sir, your line is open. Please state your company name.

Hi! JP Morgan. Congrats on the quarter. Can you talk a bit about vertical markets, strength or weakness, both in the quarter, and what you're seeing in the pipeline?

You know, the vertical markets are interesting in that the stronger you get, the stronger you get, I mean, we have been strong for years in financial service industry, the telecommunications industry. We have gotten stronger in previous years, and now it's starting to become a self-fulfilling prophecy in other industries such as the consumer package goods industry. The government had been a historically a very strong vertical for PeopleSoft. It flattened out in the last 2 years. It is emerging, once again, as one of our strongest verticals. So, I think we're getting stronger and stronger, and once we've been strong and then I think we're clawing our way into other ones. With regard to many of our product lines, we have started to template them, or in fact, develop specific versions for each of these verticals to give people a running start, a head start in the implementation of the product. In the customer relationship management area, in particular, we have developed or are still developing almost a complete verticalization approach to ensure that the companies have a product, which has been almost preconfigured for their industry. Other markets like human resource management is not quite as critical that we have a vertical market approach but in markets like, or in products areas like the customer relationship management it's heavily verticalized.

And so, was there any particular trend in terms of that conversion rates, you know, certain industries being hit harder by profitability concerns. Did that really impact your sales efforts in those verticals to any differing degree or any trend lines that you're seeing in the pipeline there?

No pattern whatsoever.

And Craig, when you talked about, it's probably hard to specify but the conversion rate fall-off, are we talking about a few percentage points over the last quarter or anything more notable than that?

Well, nothing that much more notable than that, I mean, we all know and we've all talked about the fact that the software company has two of the major dials to steer the ship, the pipeline and the conversion rate, and to some extent, it is a constant balance between keeping a high enough pipeline and a high enough conversion rate, and if you estimate what your conversion rate is going to be on your pipeline accurately, you're able to forecast quarter to quarter, and when either of the pipeline changes or the conversion rate, it can be scary. The conversion rate has gone a bit down but down, I mean, I would not say if that's dimensionally down or even significantly down, but it is down, and I just tend to want to be more open modest about that factor. At the same time, the pipeline has grown tremendously. So, we've more than made up for it, and our win rate has grown tremendously. So, the overall equation still continues to equate out to a rapidly growing company. As a matter of fact, I think there is almost a silver lining in all of those in that, although the conversion rate has dropped a bit, the pipeline has grown so much that our confidence in future quarters has actually gone higher because even if the conversion rate returns, it's returning to a pipeline that has grown so much larger than we had anticipated. That's why I said, in my prepared remarks, that the formula is still working very much in PeopleSoft's favor, and in fact, the subsequent quarter implications of a growing pipeline with an improving conversion rate should be very beneficial to PeopleSoft, that's why we've got a little bit of a spring in our step even as the conversion rates have eroded somewhat, but the pipelines have more than made up for it, as has the competitive win rate.

Great. Okay, well, again great job on the quarter. Thanks.

Thank-you.

Thank you, and our next question comes from Laura Lederman and Ma'am, your line is open. Please state your company name.

Yeah, William Blair. I have a few questions. One is, if you look at your assumptions for the third and the fourth quarter, what do you assume in the terms of the year up? How much do you expect it to deteriorate? And also, the US to continue to assume a stabilization, and also, separately, can you talk a little bit about the pricing environment? I know Siebel accused you guys of pricing on the conference call, but who are you seeing pricing out there in terms of the different segments you compete in?

In terms of the economic assumptions, we are driving our future outlook, we are not anticipating an improvement, at any point in time, in the next two quarters either in US or in Europe. We're not also expecting an enormous deterioration with those things. It's fairly much a status quo component in terms of our outlook for the rest of the year. Craig, you want to talk about the pricing issues?

Yeah, I think I may be the only CEO still who acknowledges that this pricing pressure out there, I know, in Q1, nobody seemed to want to say that there is discounting pressures but there is. So, we are under them like anybody else. We are not lower priced by the business. By the way, I don't think people license enterprise software like that anywhere. We had many situations where a competitor and when the deal was not going your way offered to give away the software, and they still chose PeopleSoft and wrote a check that they thought was fair. Most companies do not want to, I think virtually every company, does not want to do a business with a vendor at a price that they feel is going to drive the vendor out of business. So, I'm just confident that PeopleSoft is not buying business out there. It's certainly the transactions and the size of the transactions relative to our other product lines would not imply that, and I think what has occurred perhaps in this customer relationship management area, more so than others, is that competition has entered the equation in the customer relationship management area in particular, I don't think there was a strong competition until recently. So, I think when you are the only vendor with a viable solution, I do think you're able to capitalize on it to a higher, overall level. But, customer relationship management is no more or less critical to running an organization and financial management or supply chain management or customer management. So, the relative transaction sizes may tend to, over time, be more in line with other enterprise licenses done by those companies.

Companies, in the end, feel they come in range, that's a fair range for their critical enterprise software systems and may be CRM is coming within that range, but it is certainly not, you know, we're not buying business and it's not a heavily discounted area. I know for a fact that they can't be enormously discounted because at PeopleSoft, the sales organization cannot discount beyond a certain level without my personal approval, and I get those periodically and out of the 100 or 150 transactions a quarter, I might get 2 or 3 outside the range that the sales force can operate within. So I think that there is pricing pressure, I think there is pricing pressure for everybody, SAP, Oracle, PeopleSoft, and Siebel. We're not buying business on any of our product sales, and I just think that there is nothing that damaging occurring certainly at PeopleSoft's level.

Final question and that is, any very large deals in the quarter, you mentioned those greater than 1 million, but what about greater than 10 million or 5 million? Thanks.

I think in the course of the quarter, we had one transaction in excess of 10 million of the 29 transactions we described greater than one million. There was one transaction greater than 10 million, the rest of it was $10 million and below.

Congratulations on a great quarter.

Thank you Laura.

Thank you and our next question comes from Brent Thill, and sir your line is open. Please state your company name.

Credit Suisse First Boston. ASPs broke out of their 500K holding pattern to 600K, is this a trend we are starting to see on smaller number of larger deals, and I think, last quarter you said 130 new customers, can you give us a sense of where both those figures are at?

Yeah, it's hard to tell, or draw conclusion from a single data point. We don't believe the underlying trend has changed significantly. The migration from 500K a quarter to 600K a quarter is primarily just may be based on circumstantial mix for the quarter and that may be driving it. There is no real underlying trend that I see under that.

I think that $5000 or $6000 average selling prices by comparison are probably low versus any of our three traditional competitors. There are times that we think that's very good thing, because we are more predictable and less dependent on $10 million or $5 million or $20 million deals, and sometimes we don't think it's not favorable that having $10 million or $20 million, although many of them as some of our competitors are able to do, is something that we'd like to have that provides relief in the quarter. We, by and large, still do not do, not because I don't think we want to, I just don't think we go after deals in the same future packaged way that some of our competitors do. But I don't think in general it's changed. We had one deal that was more than $10 million, but by and large the quarter looked pretty much like prior quarters.

We want to know the trends that a couple of other software names you mentioned is the steam around aggregating, kind of, what they have had over the last 2 years, where they put in financials, what are you seeing in terms of aggregating it into one common platform, and how do you treat that as a revenue opportunity inside install base?

You know, I said the same thing myself several quarters ago, that as companies move their enterprise applications to an Internet architecture, they will look for a single supplier or maybe two or three suppliers, but they won't do with 20, and that is absolutely the trend, and we see that everywhere. Companies are trying to reduce the number of vendors, they are trying to consolidate their systems in a common architecture and that's just the way the world is working today. And I think the catalyst for doing that was real time Internet-based applications. As soon as enterprise applications become real time and they become collaborative between themselves, you can't afford to try that exercise with 10 vendors, because the kind of effort not working is much higher, and when enterprise applications were kind of done department by department, I won't say department, group by group, and the HR organization had an HRMS implementation in the financials that were run by finance and nothing is really collaborative, you can, kind of, do what you want. But, when all those systems are collaborative and CRM systems integrates [________________] to supply chain management system, and suppliers watch orders being placed by their customer's customers, when financial information and financial applications are updated automatically from the supply chain management system or the CRM system. You know, companies are just not willing to try that dive with that degree of difficulty with 10 or 15 vendors, so I do think that the implication of that is that you do tend to try to win the corporate like standardization exercise.

Now, I'll add as a footnote, I don't think this is a new phenomenon, I don't think it's ever been a new phenomenon. I think companies went through this exercise with hardware platforms, and if they went through this exercise with operating systems, I think they went through this exercise with databases, and I think they are now going through this exercise with enterprise software vendors, and I think PeopleSoft would do very well through this exercise, because (a) We do have an integrated suite of applications, (b) We think are best of breed, and (c) Companies tend to like us. We tend to have treated customers very, very well; and they have a high degree of confidence in PeopleSoft and affinity to PeopleSoft. So when the standardization exercise unfolds, I think we'll do very well.

And if you could just quickly just comment on the second half of the year, what should we expect from the product perspective on the second half of this year?

Well, all of under financials, Kevin can give an answer. I am expecting the growth in customer relationship management, as I said in prior quarters, to be in the second half of the year, and our pipeline would imply that that will be the case. If we have any reasonable conversion on the pipeline for CRM, CRM should start to play bigger and bigger role in the second half of the year and in PeopleSoft, you know, human resource management, that category that nobody wanted to talk about a year ago, continues to grow, a very big number, continues to grow very respectably, and even in the HR area, companies are moving to employ self service enterprise portals for their internal human capital management, and PeopleSoft provides a portal in the industry in enterprise portal for employee management. We provide 38 modules for human resource management, employee management, so we think in the second half of the year that will continue to grow. Supply chain management is kind of interesting. That category in general goes and fits and starts. I think what most companies are thinking about today in supply chain management is supplier relationship management, where supply chain management is a part of that, but you know the value proposition in supply chain management at one time is being promoted to be new market sites and buy sites software and trading exchanges and that's an important part of e-commerce and supply chain management, but in the overall infrastructure framework you have to build to really deliver on that is much broader. Non-industrial companies are evaluating, so although supply chain management is probably not the highest growth for us in the first half, it may well be in the second half. So that's where I think the growth will come from.

Just to talk about in terms of absolute dollar terms, earlier we described our Q3 expectations are between $165 million and $170 million of total license revenue. The consensus estimates for Q4, as we look at them, are about a $191 million or $192 million of revenue driven by the factors that Craig described a moment ago plus the normal seasonality of the business. That's our expectations and the consensus for the rest of the year.

Great, thanks.

Thank you. Our next question comes from Eric Upin, and sir, your line is open. Please state your company name.

Thanks. Robertson Stephens. Can you give a little more texture on a couple of things? Sales cycle and how is that changing, deals you closed this quarter obviously started beginning of this year, maybe a little less, maybe little longer, but any kind of sales cycle commentary, including are there now components of the sales cycle where there are additional review boards or additional types of bodies that are trying to clamp down on controls and how you're wrestling with that, and are you seeing more or less of that. And then secondly, a little bit about the growth opportunities you see for the business in terms of the next couple of years, and what you really see when recovery hits, and back to the domestic economy, what kind of growth this business could ultimately be generating on a two to three year basis, and your opinion maybe backed up with some kind of hiring plans you see, either over the next year or over the next couple of years in terms of headcounts and office base and so forth. Thanks.

You know, the sales cycles are lengthening, and I don't think they are lengthening because additional bodies are being added to the approval cycles. I don't think that there are additional purchase approval committees, I just think that each step, each stage of the sales approval is harder and it's stickier. To get through each step of the process, even if it was the same process being used last year, it's just got more inertia build into it, and I think as some of our competitors have indicated in their conference calls, you are not even quite sure when you get to the last step that it's going to get approved, so I think the sales cycles are lengthening but not because there is more bodies in between I just think that each step is cognizant to their company's desire to control expenses. I think that we surely did not see the US economy worsening or at least US existence of customers getting any worse like I said we maybe saw if anything a bit of a improvement in the US, international took the major hit in Q2 from a growth point of view, but even so it still is pretty good broad growth areas for us. I don't see any signs of recovery, and I know we're all very optimistic as individuals, but I think we have to separate optimism and emotion and just face reality, and the reality is I don't think there are any signs of improvement. We on an economic basis, I am not an economist and we don't watch it everyday but that's my thought, our business plans for the remainder of this year and all of next year have growth drivers built into them

assuming that the market doesn't improve, and some of our growth drivers of course include customer relationship management, continued improvement in international, continued growth in mid market, we will have a couple of very major announcements on August 28, 2001, at our user conference in Atlanta. If you have never been to Atlanta, in August you need to go, get some experience. But we are going to make a couple of very major announcements on August 28, 2001. So finally in terms of hiring, I think, we are as well managed company and is nimble a company in adjusting our expense and head count rates to what we are seeing, you know, the PeopleSoft I think to some extent until in the last couple of years had been a company that was not particularly self directed in the expense management and hiring plans. I think we are extremely soft directed today. So we have business plans, we are sticking with the business plans, and in the end we are sticking to business plans, because we have new data to support not sticking with them and we continue to exceed them. So we are going to stick with the business plans, but we got a very high cautionary note around expenses and in fact and probably taking more measures to control expenses proactively. Hiring continues in the sales area very aggressively, I think we added 60 to 100 sales people a quarter in the PeopleSoft and that will continue as long as the pipeline seems to reactive to it and respond to it, and you know, at the same time I think, that's obviously the first area you slow down if you feel you need to, and we will certainly not be reluctant to do that.

Thanks very much.

Operator, we probably got time for about one more question.

Thank you and our next question comes from Bob Austrian, and Sir, your line is open. Please state your company name.

Banc of America and thanks. Congratulations, I have just sneaked in, I will try to keep it quick. Can you give us any mix information about the PeopleSoft 8 either total of the revenues over the last year or in terms of the number of customers, for example, US versus international, is it doing you equally well in one or the other and new versus existing customers is there any either dollars or customer counts or portions of the live 160 that you can share?

Bob, we haven't broken that out historically other than anecdotally described the fact that we are very pleased with the progress we are making in all of the areas of PeopleSoft 8, and Craig, I think, discussed the launch of PeopleSoft 8 CRM, and the fact that we did see some positive impact from that. The success from our point of view seems to be very broad based in terms of the product offering and very broad based in terms of geography, as we pointed out earlier, 39% of our revenue this quarter was generated internationally, slight increase from our prior quarter, so it's not dominated by any one group of products that we can see, and from our view, we think we have made good progress in all areas.

Bob, what I will say is that at one point when we were developing PeopleSoft 8 to [_______________] of architecture we thought one of us was going to play, and geography is that don't use the Internet that much. They don't have the infrastructure that is as Internetcentric as the United States and that absolutely hasn't been the case. Every place I go, customers want to talk about moving enterprise applications to the Internet and Internet architecture. So, even in countries that don't have a strong consumer deployment of the Internet businesses, nevertheless they are excited about moving the enterprise access to the Internet architecture. It is all we sell and we don't sell PeopleSoft 7 or 7.5 any more, so you can tell by the revenues somewhat that the adoption of PeopleSoft 8 through Internet enterprise application is pretty well balanced.

Sure, that's very helpful and actually a good tie-in to my second question which does relate to the expanded enterprise licensing. Could you just review for us as concisely as possible what exactly the extended enterprise licensing model is all about for PeopleSoft? I hear you that you are not selling 7 or 7.5 or anything predecessor of, 8 but what portion of PeopleSoft licenses continue to be derived from the installed based which moves necessarily to the newer extended enterprise that's the right level licensing model.

Well 95% of our customers or more have this extended enterprise license and they have had one back to the days of PeopleSoft 7 or 7.5. The extended enterprise license was a mechanism to increase the deployment or allow customers to increase the use of PeopleSoft applications back in the days of PeopleSoft 6 moving to PeopleSoft 7 not to a number of users or limited to one particular server, in fact enterprise wide and outside the enterprise via the Internet access and that was a licensing vehicle that we used, gosh it's got to be 2 years ago or maybe even 3 years ago. It was 2-1/2 years ago, back in the days of PeopleSoft 7 or 7.5 to allow companies to extend from server based licensing to enterprise licensing, and by the time we got the PeopleSoft 8, 95%, 96%, 97% of our customers had already extended their enterprise licenses to be able to do that so PeopleSoft 8 to that extent does not come with any upgrade deal. In PeopleSoft 8, if you are under a maintenance and you had already executed an [________________] enterprise license that was provided free.

Okay, that's very helpful and a very quick last question is do you have any information about Euro compliance whether you feel that there has been any additional demands of late, perhaps a fall out sometime in the future, as a result of companies in Europe trying to get there on the new Euro powered PeopleSoft 8 or its predecessors?

Yeah, I don't know, I just want to qualify the answer. I have not seen any major change, but I am not in a position to have seen it. PeopleSoft, of course supports Euro conversions, and it has not been on my radar screen as a major issue or major dilemma, but that's not even an answer. It is not even an incomplete answer, so I am not in a position to really answer your question. Sorry Bob.

We will get to it another time. Thanks and a great for job good news of the industry.

Thanks very much for attending the Q2 earnings call for PeopleSoft. As I said before, we continue in the most challenging economic environment through the last one year to achieve record financial results. The results I think speak for themselves, the macro trends driving PeopleSoft success or related to a superior product and architecture, and our ability to improve productivity at reduced cost, moving to the internet phase and additional dividend and collaboration, given the customers systems and supply chain management and financial systems and HR systems and that's what every company appears now to want to do. We are confident in our guidance for the remainder of the year despite a challenging macroeconomic environment, because our pipeline is growing so exponentially even as a conversion rate has stepped back a bit, but the overall pipeline is more than made up for that, and our competitive win rate has gone up dramatically, if anything I would say future guidance we are even more confident about because this pipeline will eventually be converted, and so I think we sit here today more confident in our product offering somewhat concerned about the macroeconomic environment, but overall confident that we will continue to achieve our predicted financial results. Thank you again for listening in, and we will talk to you in the quarter.