甲骨文 (ORCL) 2001 Q3 法說會逐字稿

PEOPLESOFT THIRD QUARTER EARNINGS CONFERENCE CALL

Welcome to the PeopleSoft third quarter earnings conference call. You will be able to listen only until the question and answer session of today's conference. Replays of this conference call will be available for 7 days following the call by dialing 1-800-846-5780. There is no pass code needed for the replay. Again, the number is 1-800-846-5780. I will now turn the call over to PeopleSoft's Vice President of Investor Relations David Sankaran. Thank you David. You may begin.

Good afternoon and welcome to PeopleSoft's third quarter earnings conference call. Joining me today is Craig Conway, our President and CEO, and Kevin Parker, our Chief Financial Officer. A little bit later in the call Phil Wilmington, will also join us for question and answer. During this call, we will review our results of operations for this passed third quarter. We will provide an overview of current market conditions. We will also share some of our expectations for future financial performance. After our commentary, we'll take your 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 not historical facts are subject to a number of risks and uncertainties, and actual results may differ materially. The specific forward-looking statements may relate to such matters as future customer demands, competitive landscape, including our win rate against competitors, new product development status, position in 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, Form 10-K, and 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 obligation to update any information presented in this discussion. Now let me turn the call over to Craig.

Thanks Dave. Good afternoon everybody. I won't spend a lot of time today talking about the difficult business environment. I think you probably already know this is a difficult business climate. You have heard enough companies talk about their decreased visibility, their uncertain outlook, and the difficulty of predicting the immediate future. In most part, all of that is true. But I suspect you would like to know is what was the impact of September 11th on PeopleSoft's business. As I have said publicly, PeopleSoft had more than $25 million in contracts with companies or government organizations in or near the World Trade Center. These contracts had been negotiated and most were awaiting final signatures. Even with some last minute erosion, this would likely have represented over $20 million of license revenue to PeopleSoft in Q3. Of course, that was just the start of the impact of September 11th on the quarter. Other companies in New York were also unable to move forward with their original timeframes. In fact, companies everywhere paused to examine the impact of the attacks on their business. PeopleSoft sat right in the middle of all of that. Keep in mind we're the number one provider of enterprise software applications to the financial service industry. The financial service industry is largely headquartered in New York City. Outside the United States, the effects of September 11th were less severe. PeopleSoft is a strong global provider with nearly 40% of our revenue from outside The United States. As you know, international business itself experiences a slowdown in Q3 due to the heavy impact of vacations in Europe. I am relating all of these things to put our strong Q3 financial results in context. PeopleSoft performed extremely well in Q3.

License revenue increased by 15% over the same quarter last year, and it was only a slight decline in license revenue over Q2 of only $15 million. Remarkable, I think, considering the effects of September 11th and the seasonal slowdown in Europe. Operating margins actually increased from last quarter at 0.7% over 13%. Earnings per share increased from ¢14 cents to ¢15 per share over the prior quarter, beating the Wall Street consensus estimate by a full ¢3. Expenses declined by over $35 million from the prior quarter alone. Operating profit was the highest in the company's history, and DSO dropped to the lowest level in the company's history, and maybe the entire industry, 63 days. This was a solid quarter in any economic environment or any geopolitical environment. You can only imagine what our financial results would have been without the factors I mentioned before. Why do we continue to do well, particularly relative to our competitors? Reasons really haven't changed. First, we have a superior architecture for moving enterprise applications onto the Internet. SAP still has code on the client. Oracle still has code on the client. Siebel still has code on the client. PeopleSoft has a peer Internet architecture with no code on the client, and so we enjoy a clear competitive advantage. Second reason I think is we have successfully expanded into new product areas. In the CRM industry, PeopleSoft 8 has quickly become the challenger to Siebel and a major contributor to our financial results. We also introduced products in an entirely new category called Enterprise Service Automation.

These are products that enable companies to automate or manage their service spend. For most companies, service spend is actually higher than spending on MRO, and PeopleSoft Enterprise Service Automation has gained visibility and revenue momentum in this new area very quickly. These are just two of our new product introductions. There were other new products, and there will be more new products in the future. The third reason I think we are doing well is I think we are executing well in the field. Marketing has generated a high number of leads, and our pipeline remains strong. Of course, converting the pipeline to sales is harder in this environment, but the size of the pipeline continues to offset the conversion rate. And fourth, finally, we are controlling our costs very well. You see that in our gross margins, you see that in earnings per share, costs are being controlled very carefully, and we will continue to make further additional improvements in the quarters ahead. I don't want to imply that PeopleSoft in invulnerable. I said in prior quarters that we weren't immune to the macroeconomic environment and that if the overall environment eroded further, it would affect PeopleSoft. At that time, I couldn't imagine how much worse it could get. Nevertheless, in Q3, our license revenue was only slightly off our original guidance, and our earnings per share guidance continues to be met. Kevin will speak to our Q4 guidance in just a minute. Regarding our guidance for 2002, the economic outlook is indeed uncertain right now, but our visibility is improving every day, and we think it will continue to improve between now and January. We will provide clear guidance as we always do at that time. Incidentally, the guidance we provided last January was reasoned and considered and, in retrospect, accurate.

In fact, I think we were the only software company that did not reduce guidance during the 2001 year. We intend to do the same thing in 2002. Kevin.

Thanks Craig. As Craig noted, PeopleSoft had a very strong financial quarter during a period of extreme adversity. We continued our focus on the growth and profitability of our business during these challenging times. Our results reflect that focus, as we are able to meet our original earnings per share guidance of ¢15 per share. Looking at the quarter, total revenues grew 15% year-over-year to $509 million, as continued market demand for our PeopleSoft 8 peer Internet applications and services drove year-over-year increases in license revenue, maintenance revenue, and professional services revenue. License revenues in Q3 were $152 million, an increase of 15% 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 35% of our license revenues generated internationally, during the quarter. International license revenue was lower sequentially due in part to normal seasonality. Year-over-year license revenue growth was 24% in the US and 3% internationally. Using constant foreign currency exchange rates, the international growth rate would have been 9%. While we don't breakout our license revenue by product category, the majority of the sequential decline was related to our financials product line, where our pipeline was somewhat weighted toward the financial services industry in the US. Having said that, we did see strong results across all of our other product lines. During the quarter, we won a number of large deals including Aon France, BNP Paribas, Burlington Resources, Children's Hospital of Boston, Chubb Group, Duraflame, Duke Energy, FedEx, Harvard University, Home Depot Ltd., Mazda Motor Corp., Office Depot, PepsiCo, Perot Systems, Phillips Petroleum, Sony Electronics, The Texas Education Agency, and the US Census Bureau.

In Q3, we signed 27 deals in excess of $1 million, and our average size deal exceeded $700,000. We also added 103 new customers during the quarter. New customers accounted for 43% of our license revenue, above the recent quarterly average of approximately 37%. Notably, since the launch of PeopleSoft 8 in September 2000, we have added over 600 new customers. The number of customers live on PeopleSoft 8 more than doubled during the past 3 months, doubled to more than 350, and we expect the number to be higher than 500 by the end of the year. We also saw significant improvements in license margins, which increased to 92% up from 89% in Q2. Reviewing service revenue, Q3 service revenue of $333 million increased 21% from the same quarter last year and was down slightly sequentially. The major components of service revenue, maintenance and professional services, increased year-over-year by 19% and 23% respectively. Maintenance revenue increased sequentially, while professional services revenue declined from Q2. The decline related primarily to lost trading and billable consulting days following the September 11th attacks. Despite this, service margins in Q3 increased to 49%, up from 45% in Q2, and improved from 44% in Q3 of 2000. The increase is attributable to improved utilization throughout the quarter, as well as improved cost management.

Reviewing our overall operating expenses, our total expenses grew at a much slower year-over-year rate than total revenue. We have continued our focus on profitably managing our business. Our hiring remains targeted on revenue generating headcount, sales reps, and billable consultants. In addition to carefully managing headcount, we continue to keep a close eye on all of our expenses. The clearest way to see the results of this focus is in the expansion of our operating profit margin, which more than doubled from Q3 of 2000 to 13.4% during the quarter. We have reported higher operating margins in each quarter this year, an achievement we are very proud of, especially in this difficult environment. During Q3, our sales and marketing expenses increased to $126 million from $117 million in the third quarter of 2000. The increase is due to our continuing investment in marketing activities and the addition of new sales reps to leverage the PeopleSoft 8 opportunity. During the past year, we have increased the number of direct sales reps by over 50%. Q3 sales and marketing expenses were 25% of total revenues, consistent with recent quarters. Product development expenses, including the cost of development services, were $93 million, a decrease of 16% from the same quarter last year and 7% sequentially. The decrease is primarily due to lower costs associated with the release testing as we complete the rollout of PeopleSoft 8 across all of our product segments. As a percentage of revenue, product development expenses, including the cost of development services, declined to 18% of revenue, down from 25% in the third quarter of 2000 and from 19% in the second quarter of 2001. We continue to expect product development expenses, as a percentage of revenue, to decline over the next several quarters, ultimately reaching 15%.

G&A expenses were $41 million for the quarter. G&A as a percentage of revenue was approximately 8%, flat with Q2. Other income, which consists primarily of interest income, decreased to $8 million in Q3. The decrease is directly attributable to lower interest earned on our cash balances and foreign currency exchange losses. Looking at profitability, we made significant progress during the quarter. Operating income from our current operations increased year-over-year by 166% to an all time high of $68 million. Operating margin from our current operations, as a percentage of revenue, was 13.4%, up from 5.8% in Q3 2000. Net income from our current operations increased year-over-year by 113% to $50 million, also a record performance. Earnings per share from our current operations came in at ¢15, on target with our guidance given in July. This result was ¢3 better than Wall Street's consensus estimate, up ¢1 sequentially, and up ¢7 from Q3 of 2000. Reported GAAP earnings per share, including the net favorable after-tax impact of 2 nonrecurring items, was ¢16 for the quarter. Focusing on our balance sheet, significant highlights for the quarter include cash and investments increasing by over $100 million during the quarter to an excess of $1.5 billion at September 30. This reflects our continuing focus on maintaining a solid a cash flow and strong balance sheet. In fact, during the past 12 months, our cash and investment balances grew by over $500 million, a 51% increase.

Cash flow from operations was $122 million during the quarter, up 213% from Q3 of 2000. Day sales outstanding or DSO declined to a record low of 63 days at the end of the third quarter. This is a significant improvement from 68 days last quarter. During the quarter, we saw improvement in our accounts receivable aging in virtually all geographies and all categories. By now, it goes without saying that we do not factor any receivable during the quarter and we do not intend to factor any in the future. We are very pleased that our focus on collections has driven DSO down to best-in-class levels, and going forward, we expect DSO to remain in the 70-day range. Total deferred revenues decreased in Q3 by 4% from the prior quarter, to $501 million. Consistent with our previous guidance, deferred license revenue declined by $9 million during the quarter, leaving a remaining balance of $17 million at September 30th. Again, consistent with our previous guidance, deferred license revenues may continue to decrease slightly going forward. I want to spend just a moment on capitalized software. During Q3, we had a $3 million increase in net capitalized software. We also had an $8 million increase in Q2. Both of these increases were related to acquired software, not capitalizing our own operating costs. In fact, we did not capitalize any internally developed software costs in Q2 or Q3. Summarizing the results for this past quarter, we are very pleased with our continued strong performance during a very tough macroeconomic period. As we look forward, we do not expect these continues to change in the near term. However, our pipeline continues to be at very high levels, and our executions remain strong. For Q4, we expect to increase earnings per share by ¢1 sequentially to ¢16, equal to current Wall Street consensus estimates.

These results for Q4 will put our full year 2001 earnings per share at ¢56, within our original guidance of ¢55 to ¢60, achieving our original 2001 guidance which was first issued a year ago, quite an accomplishment during a year when business conditions deteriorated so dramatically. However, on reviewing the details of some of the street models, we expect slightly lower sequential growth in licenses fees, but we are forecasting lower costs and higher operating margins. Specifically, we are expecting license revenue growth in the 10% range, modest service revenue growth, and operating margins in the 13% to 14% range. As Craig noted, with each passing day, we being able to separate the impact of September 11th from the overall demand environment, and we look forward to providing detailed 2002 guidance during our Q4 conference call in January. Let me turn the call back over to Craig for some additional commentary.

Thanks Kevin. I would like to close by saying that I continue to be very optimistic about the future. The industry is in the middle of a very fundamental change, as companies move their enterprise applications onto the Internet. This represents a huge cost reduction and a dramatically increased productivity for most companies, and the return on investment is very short. These advantages are attractive to companies, particularly in a difficult economy. PeopleSoft is well positioned to take advantage of this architecture change. At the same time, we're investing the proceeds of our success in new product areas. We're not immune from a macroeconomic environment, but you've seen in our Q3 numbers, the results of a well-managed company successfully operating in a difficult environment. Open it up to questions.

Thank you. At this time, if you would like to ask a question, please press '*1' on your touch-tone phone. You will be announced prior to asking your question. Again, if there are any questions at this time, please press '*1' on your touch-tone phone. If you would like to withdraw your question, you may press '*2' to withdraw your question. Our first question will come from Tom Berquist of Goldman Sachs. You may ask your question.

Good quarter guys in a tough environment.

Thanks Tom.

With respect to Momentum, I know there's been a lot of scuttlebutt recently. We got a press release that came out a few weeks ago. Could you give us an update on what you are planning on doing there in the first quarter and what the potential impact might be?

I'm Kevin. As we've said all along, we expect to make a decision with regard to our relationship with Momentum Business Applications towards the end of this year or the beginning of next year, and we're sticking with that commitment. As we look at the P&L impact, we largely expect it will be P&L neutral to us. We have a royalty that we pay Momentum. If we were to exercise our call provision on the shares, that royalty would go away. But that in turn would be replaced by amortization of the acquired assets, which would, in our view, completely offset that royalty. So a P&L neutral transaction with no real gross margin impact.

Great, okay. And then separately with respect to guidance for 'O2, from your comments, it sounds like you're going to defer that until the end of this quarter. Is that correct?

That's correct. I think that's really served in our best interests and the best interests of both analysts and shareholders. As we mentioned, everyday our visibility continues to improve, and we're more clearly separating the events of September 11th, and that's really what we've done as a normal business practice as well. So we look forward to providing clear and articulate guidance in January.

Okay, and then one final question. Can you give us any sense as to what Toyota business looked like the first couple of weeks of this quarter?

Phil, there's a caller here. Phil Wilmington who is our EVP of North American operations is also on a call with us as well. Phil that's probably a question best answered by you.

Tom, I believe that what we're seeing in the competitive landscape and in the business right now is people kind of regaining their balance and focusing on ways to improve their organizations. We're seeing very strong pipeline levels, actually the strongest ever in Q4 in the history of the company. Kevin has stated the numbers that we feel financially that that will be able to produce, but we see a balance to cross our product lines and are confident about the ability to achieve Q4 objectives.

All right, thank you very much.

Thank you. Our next question comes from Neil Herman of Lehman Brothers. You may ask your question.

Hey guys. Nice job. If you could give us a sense as to what specifically you're seeing from, I guess, your 3 major competitors being SAP, Oracle, and Siebel. And then on that last note with respect to Siebel, could you talk about any specific CRM wins in the quarter versus Siebel? And then one followup question.

Okay, well I think, I didn't listen into the SAP call this morning. I understand that they reported weakness in the US. We've certainly seen weakness in SAP in the US. They continue to be a strong international competitor. We believe we are winning most deals against Oracle now, and relative to Siebel, we had a very successful introduction of PeopleSoft 8 CRM. Our pipeline immediately quadrupled, and we did announce some significant wins in Q3, and we'll continue to announce those wins in Q4, not only as they happen, but as we work out the agreements with the companies to allow us to do that. But we were pleased with the contribution of every product line in Q3, with the exception of financial applications, which were most directly impacted by the September 11th attacks.

And then as a follow-on question. In a normalized economic environment, taking a very long-term view, what do you think the kind of sustainable 3, 4, 5-year underlying revenue growth rate is for PeopleSoft? And then secondly, if you were to take your timeless business model, what do you think are reasonable goals and objectives from an operating margin perspective?

Well I'll have Kevin talk about operating margins. The rest of your question, Neil, was it's such an enormous what if question, that I'm not sure it's answerable. We're just now putting together the 2002 business plan here in October, and we'll be finished with that first week or two of November. I have a personal goal of PeopleSoft achieving $5 billion by 2005, but it has no greater data or statistics around it other than almost a personal goal on my part. We think we're gaining market share. As a matter of fact, we think we're pulling away from our competitors. If you look at their financial results this quarter, we're the only company that's increasing in total revenue and profitability and operating income, and decreasing DSO. Every metric you look at shows PeopleSoft pulling away. So we'll take that data study in October-November, come up with a 2002 business plan, and hope to project out in the next few years, but this is a tough industry to project 3, 4 or 5 years down the line.

And in terms of a steady state business model, Neil, what we've been talking about I think publicly is that the steady state business model really has an operating margin in the high teens, call it 16%, 17%, 18%, and that's really a return to PeopleSoft's historic profit levels, and that's really our objective in a steady state business.

I think by design if it could go higher, we wouldn't let it go higher because what we've learnt in this business is you have to plough a significant amount of your revenue back into research and development. Maybe not to 27%, we plough to get PeopleSoft date-to-market, but certainly in that 15% to 20% range is kind of a maximum-minimum all put together.

A third one, quickie last one in, and that is in terms of growing your sales force, are you still adding net head to your quarter carrying sales force?

Phil why don't you answer that question?

I think the direct answer to your question is yes. Unlike the other players in the marketplace, PeopleSoft is continuing to grow its sales force. Back in the April call, we committed to do that, and we're doing that. But I think we've got two other key factors as it relates to our staffing. One, given the market conditions and the way that it has impacted many other companies, this is a fantastic opportunity for PeopleSoft to upgrade the sales force that it has in place, not only continue to grow it. Sales force, sales people do flock to the lead product and the stable companies when market conditions get difficult. We have the advantage of having both of those in place, so we've definitely done that. The other is we're being very successful in recruiting directly from our competition, and while there have been reductions in other staffs, that's not the competitive force that I'm referring to. I'm referring to actually being able to go in and take out some top performers from our direct competitors Siebel, Oracle, etc.

Thank you gentlemen.

Thanks Neil.

Thank you. Our next question is from Jim Mendelson of SoundView Tech Group. You may ask your question.

Thanks. Craig, could you talk a little bit about your feelings with regard to deferrals as it relates to 1 quarter, 2 quarters, 3 quarters? I know it's a difficult question, but it would be very interesting to have some framework relative to some of the situations that you saw slip, kind of a guesstimate as to what the average timeframe might be for them to eventually be realized.

You're talking about the deals that were impacted by the September 11th terrorist attacks?

While why don't we exclude perhaps the immediate companies that were perhaps impacted, but talk more from the broader sense, companies that paused because of the impact, but weren't directly hurt.

To me it seems, I think of it as a pyramid. The top of the pyramid are companies that were absolutely physically impacted by the September 11th terrorist attacks, and I'm not sure those deals we'll ever see. I wouldn't call those deals, deals that have been pushed forward. I would call those deals, deals in question. I think the next layer of the pyramid are companies whose businesses have been impacted so severely that the businesses moved out and may move out more than a quarter. And then I think there's the rest of the pyramid that are companies that are just nervous, and as Kevin said, I am not sure that there's any near-term improvement in the business environment that any of us see. I mean I'm only suspect when I'm listening to Bloomberg and I hear some companies say that they see an improvement mid next year. I am not quite sure how anybody can make that statement. What data are they using? It's always interesting to me that the date that they pick for turnaround is always 6 months out. So it is close enough to be interesting but far enough not to be accountable to. I think that we continue to find ways to achieve our financial objectives through a broad product line, through a sales organization that is executing pretty well, both domestically and internationally, and I am not actually sure, I am not trying to dodge the question, but I am not actually sure how to predict those 3 levels. I am trying to be honest, but the top level are not deals we kind of count on at all. The mid level are even suspect, at least for a quarter or two. I am talking about the airline industry. I am talking about the hospitality industry. But that lowest level, which is also the biggest part of the pyramid, is a group that represents the largest amount of the market, and I think it is nervous.

But I think it is receptive to the traction of lower cost and higher productivity that results from moving enterprise applications to the Internet. And if they can do it with a short enough ROI, I think they will move ahead with it.

And one final question. In driving this quarter's growth in a difficult period, obviously the US was remarkably strong despite the disruption, and I guess, I am curious at the margin. How do you rank things like the additional product availability versus just the architecture driver that's helping you in competitive situations?

Yeah, I don't have the numbers, but I would say it's probably a half to two-thirds the core architecture advantage of PeopleSoft to cross all their product lines, and I'd say it's a third to maybe as high as a half new product developments that we've invested in and that are resulting in real revenue. When I came to the company 21/2 years ago, we were in a heavy investment cycle on business analytics, and that was a category that was very, very new at the time, and enterprise software vendors were largely absent, and we were putting a ton of resources behind it. Today, analytics is a significant amount of our quarterly revenue. I made a place in the CRM space. It is now a significant amount of our revenue. The Enterprise Service Automation space was an investment we made, as you might recall, about a year ago, and Enterprise Service Automation has become a significant contributor to revenue. So it's anywhere from 50-50 core advantages of our architecture to new products to maybe 65-35.

Okay. Thank you. Good job.

Thank you.

Thank you. Before we take our next question I would like to remind all participants to please limit yourself to one question. Again, please limit yourself to one question. Our next question will come from Gretchen Teagarden of Salomon Smith Barney. You may ask your question.

Great, thanks, a question for Phil Wilmington. Phil when, based on your competitive intelligence, do you think that Siebel and SAP will be caught up to PeopleSoft from the architecture standpoint alone?

Gretchen, we believe that we still have an 18 to 24-month technology lead over the rest of the software market including Siebel. We right now have hundreds of customers live on PeopleSoft's Internet technology, which we've shipped a year ago. The competition is still talking and actually shifting dates when it may be available to the marketplace. I think one of the things that was a key contributor to our performance this quarter and our increased advantage from a competitive landscape is not only now the architecture itself but the referencability of the customer base, and that certainly will take the 18 to 24-month period that I mentioned for our competitors to catch even when they do rollout a product. So we are very excited about the duration, which we think will continue to enjoy this competitive advantage.

Right. Thank you.

Thank you. Our next question will be from Craig Wood of Merrill Lynch. Thank you, you may ask your question.

Okay, thanks very much. On that same subject, can you provide some numbers about your go-lives for PeopleSoft 8? Can you just talk about PeopleSoft 8 CRM and what progress is being made in getting customers live now that that product has been in the market for about 4 months? And what your expectations are to have live customers by the end of the year?

Well, PeopleSoft 8 CRM just started shipping in the last 90 days or so. So the go-lives on PeopleSoft 8 CRM are in process. We do have several companies live and they are referencable, and so we can give you the names of van Thomson Financials, Polycom, and just a few others. The bulk of PeopleSoft 8 CRM companies going live will probably start to kick-in in Q4 and continue to ramp from there.

Okay, thank you.

Thank you. Our next question will come from Brent Thill of Credit Suisse First Boston. You may ask your question.

Thanks. If you could just give us a quick update on you're seeing in the mid market?

We have targeted the mid market again in 2002 as a strategic objective of PeopleSoft's. We are doing about 40% of our deals each quarter now in companies that are $250 million and below. We think that's going to go up, and we have restructured a program to specifically target them that ranges from special license pricing to packages to implement on a guaranteed fixed base, fixed time basis. We have a specialized sales organization that has been targeting the mid market, and it continues to be one of the segments of the business that is expanding and certainly not contracting. So we continue to put a lot of emphasis on it. We also have most of our eCenter customers, our hosted customers, come from the mid market as well. So that's another portion of PeopleSoft that's directed squarely at the mid market.

Thanks.

Thank you. Our next question comes from Tim Getz of Prudential Securities. You may ask your question.

Thank you. Just looking for a little bit of color on the ASPs. I know that there were some pricing decreases during the quarter around the mid marking products and also the portal products. Yet ASPs continue to increase. So can you just give us an idea on what's actually driving that? Is it the new customers? Are they taking more modules? Are they buying full suites? Thanks.

Phil you're probably closer to that than anyone. Phil?

Yeah. Tim, I think that it's really driven by a couple of key factors. One is the breadth and balance of our product line. We had 55 deals during the quarter, which were multi-suite deals, and they brought 2 PeopleSoft product suites or more, as they became new PeopleSoft customers. So these were 55 transactions that were over $500,000 in value. So as you look at new customers coming on board, they are really buying into and embracing the end-to-end eBusiness product set that PeopleSoft brings to the marketplace. So we're very excited about that and that was probably the most direct impact on the ASP during the quarter. We did, as Kevin indicated, over 103 new customers, and we saw that be the driver in that segment of the market space. The other transactions that we did, which were nearly 400 other additional transactions, were a combination of best-of-breed evaluations where we went head-to-head with our competition and won, or as we had hoped in previous conversations in previous quarters, we saw our existing customers begin to add PeopleSoft 8 additional modules onto what they had already licensed from PeopleSoft. So it created a nice balance in terms of the blend of transactions. But the ASP was actually increased by the multi-suite deals that we saw from many of the new customers.

And Phil I will add to that. Keep in mind that the traction moving enterprise applications, the Internet, is really two-fold. One is the reduction in cost of the installation, administration, ongoing support of Internet-based applications, their accessibility all over the world, anywhere, anytime. But the second advantage is once you have extended your enterprise applications directly out to your customers and suppliers, your employees over the Internet, you can establish collaboration between them. If you agree that that is an advantage of Internet-based enterprise applications, you tend to want to take advantage of that with your customer relationship management applications and your financial applications and your supply chain management applications and your HR management applications. So almost by definition, if you buy into the vision of a collaborated enterprise, you will wind up licensing multiple suites of products.

Thank you.

Thank you. Our next question will be from Jon Ekoniak of US Bancorp Piper Jaffray. You may ask your question.

Hi, great quarter. Can you comment on the success of your ability to turn a PeopleSoft 8 upgrade customer into a revenue event, especially on the license side? And if a customer is buying additional modules with the upgrade, do they typically buy it upfront or are they waiting for the upgrade to be fully installed first before making those purchases? And then finally, if you could comment on some of the stats in terms of upgrades both on the eBusiness product suite, as well as the CRM, that'd be great. Thanks.

Phil?

I think what we are seeing is that it is a revenue event when people choose to begin the upgrade process to PeopleSoft 8. I mean many of the, and I apologize I don't have the exact number in front of me, but of the 350 plus customers that are live on PeopleSoft 8, those discussions all began with what is the landscape of applications that they have, and they do use that as a foundation to license additional products. And the implementation of those products, many times, are done in conjunction with that conversion effort. So it is a revenue-generating event. It is an event at which time the customer takes stock of or reviews their ability to become the collaborative enterprise that Craig just spoke off. So we have directly seen that.

And typically, just a quick followup, how many modules do they usually purchase and do they purchase at the beginning of the upgrade or do they wait till the product is already upgraded?

I apologize. I don't have the exact statistics for the first half of the question. The second part of the question is that many of them are licensing at the beginning of the upgrade process because they actually do the implementation of the additional modules during that conversion effort.

Okay, great. Thanks.

Thank you. Our next question will come from Rehan Syed of SG Cowen. You may ask your question.

Hi folks, nice quarter. Help me understand your approach to operating margin expansion versus investing for growth in terms of what kind of hiring do you plan to do, where do you think headcount will finish up end of the year, and in what areas can you trim expenses without cutting into muscle?

Hi, this is Kevin, Rehan. In terms of operating margin expansion, just looking across the entire company, we continue to believe there is ways that we can operate substantially more efficiently than we do today. We have really focused our headcount, as I mentioned, from the beginning of this year, and we will continue to focus on revenue generating headcount, and that's really where we have seen most of the additions across the year, and our headcount will probably will not grow as quickly in Q4 as it has, perhaps from Q1 to Q2 or Q2 to Q3. We expect it to increase modestly, but something probably less than a 100 people in total across the entire company. We think that gives us a good balance, and we will continue to invest in R&D and continue to have R&D including the cost of the development services in the neighborhood of something in excess of $90 million, between $90 and $100 million in the fourth quarter.

It is really a tough question. This is Craig, Rehan. It is really tough question because there is no question you can't sail your way to a leadership position in any industry. And if you attempt to just keep cutting cost, you will, as you put it, cut into muscle. And so we look at that question as kind of a multidimensional exercise, and we start at the normal line items that you believe you can cut without impacting your development to your sales effort, and then go from there. But it is very difficult, and it is kind of difficult to run in this market. As I mentioned in my remarks, we still believe there are other areas in the coming quarter or two that we will continue to reduce expenses, but there is a point at which you just can't do that anymore without selling the future vis-à-vis new product development.

Great, thanks.

Thank you. Our next question comes from Robert Maina of CIBC World Markets. You may ask you question.

Yes, thank you. I have two questions. One, you talked a little bit about financial services obviously being a very weak quarter for you guys by vertical. Can you tell us a little bit about what verticals were the strongest? I suppose government was particularly strong, maybe you can elaborate on that. And then two, can you talk a little bit about the uptake in ESA and how quickly, when should we see that being a meaningful revenue contributor?

Phil?

Well, I think, certainly we saw education in government component of our business have a healthy quarter. We saw a very strong quarter from retail. We had many accounts. Kevin mentioned a few, the Limited Home Depot, Office Depot, very influential retailers that have embraced PeopleSoft products during the course of last quarter. We did have a strong and balanced quarter in financial services, and I think Craig's comments were, but obviously that area was most dramatically impacted by the events of the quarter. So I think those business units or those industries were the strongest across the board for us. We also had strong performance in the mid market, which is really a blend of industries, but a key strategic drive for us where we had, as Craig said, about 40% of the new customers actually in that mid market. So we were pleased with the balance across the industries, and those were some of the leaders.

And on the ESA?

ESA. At our user conference, I shared a couple of statistics on ESA, which I guess I could share on the call then. We had in the last 6 months taken over 80 deals, 80 sales for ESA and that is without great a deal of marketing promotion or formal product introductions. So that will give you an idea of the attractiveness of the ESA product line to PeopleSoft and probably also imply something about the financial impact that we are getting from that area. That is a unique area and one that we think we are almost uniquely positioned to address because it is a combination of human resource management. Because after all, that is what services are. They are human resources that have to be tracked and managed. Financial applications, because that's in essence where the management is going to be reflected, and then also eProcurement because when you are procuring service resources you are doing it every single day and doing it online and from an almost an eProcurement point of view, not an MRO eProcurement, but a service eProcurement approach is the best way to do it. And I think we are the only company that brings all 3 of those things together, and so we're a natural for that industry. I have said before, I think, that industry is where CRM was 5 years ago, based on the customer interest that we experience that when we take product line out to market. So we are pretty bullish on that category.

Okay. Thank you.

Thanks.

Thank you. Our next question will come from Chuck Phillips of Morgan Stanley. You may ask your question.

Thanks. I was just wondering in terms of how many customers have upgraded. I think one of the market research firms put out a note or a comment that 50% of PeopleSoft customers had already upgraded, which is a little bit higher number than I had been using. I am just kind of wondering how you've tracked it in the past? Do you have that level of detail, I know you've [_______________], where you are on the base and what is left?

In terms of tracking the upgrades, what we have said, Chuck, is that we know that about 50% of our customers have either upgraded themselves, ordered the CDs, contacted us or one of our partners about the plans to upgrade. And we know from history that a year out of this chute with PeopleSoft 8 that is a faster traction that we've seen historically moving from 5 to 6 or 6 to 7. In terms of the actual upgrade, that's included as a component of the 350 customers that we have that are live at the moment, and we continue to see a lot of forward progress there. But still there is plenty of room and plenty of opportunity in front of us in terms of the upgrade and the follow-on sales that are associated with that.

And the reason it's a little bit difficult to assess, Chuck, is that some companies order the CDs on a new release just to start playing with them, and we don't see the follow-on sales or, I should say, associated module sales until they get ready to get serious about deploying. So half our customer base has actually ordered and received the CDs. 350 are live today. 600 will be live 60 days from now. And the figure we don't know is how many of the remaining or what percentage of the remaining are in active conversion, and as they convert, we do try to go in and sell them additional modules. I don't know what the exact percentage is, but I could comfortably say most customers as they upgrade order another module or two or three.

Okay. So of the 350, that's the target base you're saying most customers have taken that on module?

Yes.

Okay, and then the last question was in the supply chain management area, which I guess has not received quite as much attention as you've emphasized on the area, what are you doing kind of headcount-wise in that area? Are you scaling back given where we are in the cycle?

Phil, why don't you talk about it from the distribution point of view?

Actually, Chuck, supply chain management figured very heavily in the multi-suite deals that were part of the success of the quarter. If you look at it as a sample size, the 55 multi-suite deals that were over $500,000 in the new customer base, 80% of those included supply chain management. It is a key to our ability to have the end-to-end eBusiness approach which we've talked about many times in the call. When you look at CRM, it doesn't just track what's going on in the sales force, but it creates an order and it does demand planning, etc. Supply team management is a key component of that. It was in over 80% of the deals that were represented in the multi-suite deals to our new customers. So certainly, we still have sales people, which are focused on supply chain. We're seeing increased interest in activity in our CRM sales force in terms of working and including successfully supply chain, as well as our other products suites, but certainly supply chain and the success of our multi-suite transactions.

Thanks a lot, good quarter.

Thank you. Our next question will come from Cameron Steele of Dain Rauscher Wessels. You may ask your question.

Thanks very much. I was just curious, there's been a lot of marketing hype around the ERM market space, and I was just wondering if you could give us your perspective on this market opportunity and how you guys figure you stack up compatibility there?

Well, I think we gave birth to that concept, although the terminology was born recently. The idea of having an employee self-service capability available via the Internet is something we've been promoting for years, and there are two ways to look at ERM. One is the interface for employers, which is of course a portal, and there are many, many, many companies that offer a portal for basically employee self-service applications. And the second way to look at ERM is what about the applications themselves. What are employees actually doing when they get on the portal? We offer a portal, and we offer the enterprise employee applications, and we don't think there's anybody else that even comes close to delivering on both of those. Some competitors actually offer the portal and then try to coapt the term ERM. It is kind of like CRM became a year or two ago is when CRM got very hot, everybody decided to hang a shingle out that says what we do is really CRM. And I think that's what's happened with ERM is companies realized that there is an employee relationship management market. It happens to be one that we have been promoting for several years, and whether you're in the portal business or the scheduler business or the appointment date book business or whatever little application you might contribute to that or whatever user interface you believe is one that should be a standard if you are a portal company, you have now staked out the term ERM. ERM is the portal. It is the user interface. It's every application that constitutes the employee experience, virtually all of which we sell.

So we think it's a broad name, but when it comes down to it, we are very strong, if not the strongest, in all directions looking at that market. I would urge you to pick up some of the reports from the analyst firms on ERM. I think most of them are actually quite good in separating out this hype. We live in an industry that loves hype. We can't wait to find the next acronym so we can start funding companies to go after it. If you look at the analyst reports on ERM, you'll see a very cogent delineation of what it really means and who really does what, and I think virtually all of the analyst reports conclude that that market's PeopleSoft's to lose.

Right, thanks very much.

Thanks Cameron.

Thank you. Our next question will come from Bill Chappell of Robinson-Humphrey. You may ask your question.

WILLIAM B. CHAPPELL, JR.: Yeah, just a quick question on the margins going forward and kind of the services margin last quarter. I mean taking out September 11th, I don't think that's tough thing to do, would you see gross margins for services go in excess of 50%? And I mean is it something that's sustainable over the next 2-3 quarters?

It's an unusual what if. We're very pleased with the progress that we've made so far. We set out at the beginning of the year to really focus on the profitability of our overall services business, and I think the results quite reflect that. On a going forward basis, I think 50%. We're 49 now. 49% to 50% is a pretty reasonable target, and as I said, we've been very successful at improving it over the course of the year, and we're happy with the progress.

And I wanted to add a clarification, and I don't want to come across too outspoken or confident, but September 11th had a very significant impact on every part of our business, and we sit around and only wonder what our business would have looked like without it. And I think it's fair to say that every component of our business, even though it's extremely attractive sitting on this call, would have been better. Now whether it could have been held quarter-to-quarter in the future, I think, is a valid question and one that Kevin I think has answered accurately. But every metric in our company, I believe, would have been better had it not been for September 11th, and they all came out pretty good as it was. So we feel very fortunate. We also feel there is more there.

WILLIAM B. CHAPPELL, JR.: Thanks. Congratulations.

Thank you.

Thank you. Our next question will be from Jamie Friedman of Fulcrum Global Partners. You may ask your question.

Hi. A couple of quick questions, and I know that these have been asked previously, we got in late in the call here, but I'm going to phrase them, I think, slightly at a different angle, if you will. One, at PeopleSoft Connect, you gave some general color about the take-up rates of CRM 8 and the analytics of the ESA. I was wondering, do you think those could be as high as 30% of next year's revenues? And then second, in terms of the selling opportunities that you typically speak of, the new customer cross-sell and up-sell, I think is the way you phrase it, could you provide some additional color specifically to the sales and marketing strategy that's enabled you to win in the competitive bids over the CRM point solutions? So first question, CRM, ESA, and analytics as a percentage of revenues next year, and second competitive wins in CRM over the point solution. Thank you.

Jamie the answer to the first question is yes, I would expect those products could represent as much as 30% of the total next year because CRM is already contributing a healthy amount this year. So you don't have to add too much more ESA or analytics to get to that number. That race I hope is a spirited race because we are not sitting on our hands in the HR category or the financial applications category either, and we think those markets, although they're very large numbers, will continue to grow. And so I hope that percentage race is a good one, but at the current trajectory, the answer to the first part of the question is yes. PeopleSoft in the CRM space, while we best of breed, I would say more than 50% of the reason is the architecture. I would say that 25% of the reason is the integration with other enterprise applications. A decision to the point of best of breed CRM product is a decision to buy middle wear. It is a decision to have 2 shifts, one with the best of breed CRM provider and with middle wear company. So if you can prove that the CRM product offering you have is competitively best of breed, there is a high attraction to an integrated suite provider, and I'd say that's the total of those 2, and it's anywhere from 75% to 90%. I think the last component is companies want a choice. Not everybody wants to buy from the leading market share CRM provider. There are characteristics about companies that would just like a choice, and I think that plays a role in maybe as much as 10% or 15% of our wins. They just like PeopleSoft better.

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

Thank you. Our final question comes from Timothy Dolan of Deutsche Bank Alex.Brown. You may ask your question. Actually it looks like Mr. Dolan's line just disconnected. It looks like that was our final question.

Why don't we end there.

Some closing comments from Craig, before we head out, and thank you very much for joining us on the call.

Again, I feel very optimistic about the year ahead. I might be the only human being in the software industry that does, but I feel very optimistic about our position in Q4 and our plan for 2002. There is no question it's a difficult business environment. I've tried to say as many times as I can that we're not immune from it, but I think we're also pretty proud of the performance of our product line, our sales organization, our marketing organization, our G&A organization. I think we are managing well in a difficult environment, and I expect that to continue. Thank you very much.

Thank you for participating in the PeopleSoft conference call. Goodbye.