甲骨文 (ORCL) 2003 Q1 法說會逐字稿

Welcome to PeopleSoft's 2003 first quarter earnings conference call.

All lines are listen-only mode until the question and answer session of this conference.

This call is being recorded on behalf of PeopleSoft.

Replays of this conference call will be available for seven days following the call by calling 888-299-2309.

No pass code is needed to connect to the replay.

I will now turn the call over to PeopleSoft's Vice President of Investor Relations Lori Faris.

Thank you.

Good afternoon and welcome to PeopleSoft's first quarter earnings conference call.

Joining me is Craig Conway, PeopleSoft's President and CEO and Kevin Parker, PeopleSoft's Chief Financial Officer.

During this call we will review PeopleSoft results of operations for the first quarter and provide an overview of current market conditions.

We will also share some of our expectations for PeopleSoft future financial performance.

After the 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.

The particular forward-looking statements and other statements 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 among other things, such matters as feature custom demand, competitive landscape including our win rate against competitors, new product development status, position in the enterprise application sector and future financial performance expectations including revenue, operating margin and earnings expectations.

Please refer to the company's current earnings press release and Annual Report on form 10-K for more information on some of the risk factors that could cause actual results to differ.

Please remember that the company undertakes no obligation to update any information presented in this discussion.

Now, let me turn the call over to Craig.

Thanks, Lori.

Good afternoon, everybody.

As you know PeopleSoft's license revenue was below expectations in Q1 but all other aspects of our business were on plan.

Professional service revenue which is consulting and training was $179 million, a slight increase quarter over quarter and year over year.

Maintenance revenue was $200 million representing a 5% increase quarter over quarter and 21% increase year over year.

Licensed revenue, however, was a significant decline in our business last quarter at $81 million, a 39% decrease year over year.

Nevertheless, the increases in professional service and maintenance revenue along with continued reductions in operating expense allowed PeopleSoft to post strong earnings of 12 cents per share, only a penny below guidance.

Other financial indicators also remained strong.

Cash flow continued strongly positive at $75 million.

DSO was only 61 days and total deferred revenue actually increased $26 million during the quarter.

Clearly licensed revenue was the single unexpected negative factor in our quarter.

Lower licensed revenue in Q1 reflected a significant slowdown in capital spending.

The slowdown in capital spending resulted from a accumulative affect of a number of factors that continued to increase rather than decrease as the year began.

Certainly, the continued affects of the dot-com bust continued to be felt with lower tax revenues causing budget deficits in all 50 states and the federal government.

The Iraq war brought a tremendous chill to the economy both here and abroad.

Finally, just when you thought things couldn't possibly get any worse, the mysterious virus called SARS has emerged.

Each of these additional factors has a significant direct impact on some industry segment.

For example, budget deficits impact state government spending in state universities.

The Iraq war impacts federal government spending, SARS has a direct impact on the airline and hospitality industry which they can least afford at this time.

These additional factors also had a accumulative impact on the overall economy.

Each of these factors has dropped the temperature another 2 degrees at corporations around the world.

When the temperature goes down, molecules slow down and so does corporate spending.

These factors were additional burdens to an already weakened economy.

So whatever fragile recovery that had begun simply fizzled.

PeopleSoft's license revenue shortfall was directly related to these additional economic factors.

We were probably disproportionately affected by the slow down in certain industry segments in which we were particularly strong such as government.

For example, federal, state and university sales are often 25% of our total U.S. revenue.

However, we saw a general decline in licensed revenue in the U.S. in every international market that was so consistent you could have plotted it with a ruler.

We also saw no evidence of any other factor accept a general economic slowdown.

Our pipeline did not decrease.

It's 11% higher today than a year ago.

Our win rate did not decline.

We did not see unusual competitive pressure.

We closed about the same number of new customers, and we did about the same number of existing customer transactions.

Everyone simply spent less.

Kevin Parker will review these numbers in detail.

They are remarkable, first and foremost, in their consistency.

At this point, the question for PeopleSoft is whether to be defensive or offensive for the remainder of 2003.

Do we protect earnings at all costs or continue to invest aggressively in the down market to further distinguish PeopleSoft from weaker competitors?

We are fortunate to have the strong earnings to even consider this question.

I remind you that one of our major competitors has struggled to maintain any profitability in Q1.

After careful consideration, we decided to do both.

We had some investment opportunities that are available to us that are simply too important not to make in 2003 and we will make them.

For example, expanding our development and implementation capability in India is too important not to invest.

Expanding our midmarket product line is too important not to invest.

Both are important for our long-term success and there are other examples of investment spending.

At the same time we will continue to improve operating efficiency in reduced cost further.

Kevin Parker will provide detailed examples including lower capital spending ourselves, lower facilities cost, lower marketing expenses and reducing a small number of head count not related to development, sales or consulting.

Together we believe these cost reductions will offset some of the investments we intend to make in 2003.

PeopleSoft is fortunate to have a multidimensional business of license, professional service and maintenance.

We believe professional service and maintenance will continue on plan the remainder of 2003.

For licensed revenue in Q2 we assume a modest seasonable improvement for between $85 million and $95 million.

For Q3 we assume no license revenue increase from that level as normal increases in government spending are offset by lower spending in Europe during the summer months.

And for Q4 we assume a modest recovery of between $125 and $135 million of licensed revenue.

Even with these conservative assumptions, PeopleSoft can expect to exceed 50 cents in earnings this year and make important long-term investments.

Altogether a remarkable performance considering an almost worst-case economic scenario.

So when will the economy improve?

The economic data is mixed at this point as you know.

Some economic data points to a recovery and some does not.

But I continue to add confidence in PeopleSoft in this market either way.

Companies in this market are consumed with improving operating efficiency and reducing costs.

That usually means some type of automation, some type of reduction of intermediary somewhere in the business process and that's exactly what internet based software can do.

The ability to spend on this technology may be challenging in this market.

But the sound business rational to invest in technology remains compelling.

It's been my experience that technology spending can be deferred but occurs at a later time with force as a result of pentup demand.

The ground hog may not have seen its shadow in Q1 but does not mean that spring is not coming.

It always comes.

And therein, I think, lies the value of an investment in a large company like PeopleSoft.

Our maintenance and professional service businesses provide insulation from downside and our license business provides potential for very rapid upside growth.

I don't think there's many other companies that provide both a degree of downside insulation and an ability for rapid growth.

I have confidence in PeopleSoft today in this market and when stronger spending returns, and it will.

We have a broad well-respected product line and a very strong professional service offering.

We have confidence in our strong internal financial controls and confidence in the professional service offering management team of the company.

I'm proud of the strong support we enjoy with our customer base and also proud of the strong commitment culture of our employees.

Economic conditions good and bad eventually pass and in the mean time, PeopleSoft will continue to benefit from the consolidation of the enterprise software industry and from our investments in new products and professional services for our customers.

Kevin?

Thanks, Craig.

As Craig noted, Q1 was a very challenging environment characterized by increasing levels of economic uncertainty.

As the economy continued to weaken and geopolitical tensions escalated, organizations world wide have slowed or postponed purchasing decisions impacting our Q1 license revenues.

While license revenues are below expectations, the impact was offset in part by the strength of our maintenance and professional businesses.

That strength combined with our focus on expense management drove a solid performance in a very challenging quarter.

Q1 earnings per share were 12 cents, within a penny of our original Q1 guidance.

As Craig noted, we generated $75 million of cash flow from operations and ended the quarter with nearly $2 billion of cash in investments.

Before we go on through the details, I'd like to take a moment and point out two changes we've made in our press release financial statements.

First, starting this quarter services revenues have been separated out in our income statement to two distinct revenue streams, maintenance and professional services.

We think this presentation gives added insight into three major sources of revenue for PeopleSoft.

We've changed historical presentation to provide the appropriate comparative results.

The second important change is the addition of a cash flow statement to our quarterly earnings release.

The addition to the cash flow statement provides insight into our operating, investing and financing activities.

We consider our cash flow to be an important measure of our financial strength and we're glad to add these details for our reporting.

Now for the details.

In a very challenging environment we added 72 new customers to the installed base bringing the total to 5,100 customers.

The number of new customers added to our installed base is equivalent to our average of 72 new customers per quarter in the first three quarters of 2002.

Organizations purchasing PeopleSoft pure internet applications included ABN AMRO, Altec SA, Anthem Insurance, Avis Europe, Fanta Corporation, Cap Gemini Ernst & Young, Central Japan Railway, DePaul University, Goldman Sachs, [Hakacoto KK], Health Care Service Corporation, Illinois Tool Works, Laquinta, Marsha McClennon, [INAUDIBLE], British Columbia Provincial Health Services Authority, Ruan Transport, Sandvik AB, State of Oklahoma, Textron and Vodafone Libertel NV, and Voice Stream Wireless and 3M.

Q1 license revenues of $81 million included license sales to new customers of $26 million.

New customer license revenue contributed roughly one-third of total licensed revenue, an increase from 25% from Q1 in 2002.

Licensed revenue from existing customers was $55 million or 68% of total license revenue in the quarter.

The ratio of license revenues from new and existing customers was virtually unchanged from Q4.

We had 15 deals in excess of $1 million in Q1 versus 25 deals a year ago and 38 deals last quarter.

The number of deals greater than $1million was almost equally divided between new and existing customers.

Not surprisingly, no deals were in access of $10 million.

That's consistent with the results of the last three quarters.

Impacted by the decrease in the number of large deals in Q1, our average deal size for new business was $505,000 below our 2002 average of $640,000.

In our view, the smaller deals were a result of customers focusing on smaller projects.

Similar to 2002, we closed more than 400 licensed transactions in the quarter.

As a matter of interest, 60% of our deals included more than one of our major product lines.

As Craig noted, the impact of the current environment was equally distributed across all product lines, industry verticals, geographies and regions.

Consistent with 2002, sales to customers in the U.S. accounted for 62% or $50 million of our licensed revenues. $31 million or 38% of our licensed revenue was generated outside the U.S. during the quarter.

Our results were not significantly different on a constant currency basis.

We continue to move forward on the PeopleSoft 8 upgrade cycle.

We have more than 2,100 customers live and 1,600 in implementation on PeopleSoft 8 applications.

Obviously, the more customers that implement PeopleSoft 8, the larger the opportunity to both upsell and cross sell our products.

Customers live on PeopleSoft 8 are able to purchase and benefit from our extensive portfolio of PeopleSoft 8 applications, as well as our new products when they are introduced.

In the first 90 days of 2003, approximately 5% of our licensed revenues were generated from the 23 new products introduced at the end of last year.

In the fourth quarter licensed margins were 89% compared with 91% in Q1 of the prior year.

The change in licensed margin is attributable to software amortization comprising a larger percentage of the cost of licenses in Q1.

Revenue from professional services which includes consulting and training revenues were $179 million up 1% from Q1 of the prior year and consistent with Q4.

Utilization of our professional service organization was above 65% consistent with recent quarters.

Average billing rates were in excess of $180 per hour.

Q1 maintenance revenue was $200 million, an increase of 21% year over year and a 5% increase over Q4.

The increase is the result of a higher renewal rate by existing customers and the addition of new customers to tour installed-base.

Q1 service margins increased at 57% up from 55% in Q4 and from 52% in Q1 of 2002.

The increasing service margins is a result of the increase in a mix of our maintenance revenue to service revenues combined with the strong expense management on our professional service business.

Our service margins in Q1 are at the high end of our established range.

We expect our service margins to normalize in the 54 to 55% range over the next several quarters as we make investments in our global professional service organization.

Total revenues including license, maintenance and professional service revenues were $460 million in Q1 compared with $483 million in Q1 of 2002, a 5% reduction.

Turning to costs and expenses, our Q1 operating expenses decreased $14 million or 3% from Q1 of 2002.

Operating expenses declined $25 million or 6% sequentially.

Sales and marketing expenses were $120 million in Q1 down 4% year over year and down 12% sequentially, primarily as a result of decreased commissions and bonuses associated with lower revenues and reduced travel expenses.

Consistent with recent quarters, Q1 sales and marketing expenses as a percentage as a revenue were 26%.

Product development expenses were $84 million down 6% compared with the prior year and down 5% sequentially.

Q1 product development expenses were 18% as a percentage of revenues consistent with the last several quarters in Q1 of last year.

In the past 12 months, we've launched more than 35 new products and expect to maintain that pace in 2003.

Our industry leading technology continues to differentiate us and we continue to outspend our competitors on R & D as a percentage of revenue.

G&A expenses were $33 million for the quarter, a 9% increase over the prior year.

The increase over the prior year is attributable to increases in insurance, depreciation and facility costs.

G&A expenses were 7% as a percentage of total revenues.

Other income which consists primarily of interest income and foreign exchange gains and losses was $7 million in Q1 of 2003.

In Q1 our tax rate was 34.5%.

The combination of the decline in revenues from the reduction in operating expenses resulted in Q1 operating margin as a percentage of revenues of 11.3% compared to 12.5% in Q1 of 2002.

Q1 operating income was $52 million compared with $61 million in the prior year.

Q1 net income was $38 million or 12 cents a share, a penny below the low end of our original Q1 guidance.

Undoubtedly a strong performance in challenging circumstances.

Moving to our balance sheet, cash and investments increased by $23 million during the quarter to nearly $2 billion or an excess of $6 a share.

During the past 12 months our cash and investment balances grew by $130 million.

Operating cash flow was $75 million for the quarter.

DSO or day sales outstanding at 61 days was an improvement over DSO of 63 days in Q4 and at the low end of our targeted range of 60-70 days.

These strong balance sheet metrics were the direct result of our operational excellence.

Total deferred revenues of March 31st increased $26 million to $544 million, an increase of 5% from Q4.

Deferred license revenue was $8 million and consistent with the last several quarters comprised less than 2% of our total deferred revenues.

We expect deferred license revenue to remain a very small component of our overall deferred revenue.

Deferred maintenance and services were $536 million, an increase of 5% or $27 million from year end.

Deferred maintenance represents the unamortized portion of maintenance that has been both billed and collected.

In Q1 capital expenditures were $87 million and primarily related to the acquisition and construction of office facilities.

In February we exercised our $70 million option to purchase a portion of our headquarters facilities in Pleasanton leased under a synthetic leasing arrangement.

There is no significant income statement impact related to the purchase in current or future periods.

The company has an option to purchase the remaining synthetic lace in Q3 for $105 million.

In order to reduce operating expenses by more than $1 million annually, we are in the process of constructing a building at our headquarters facility.

The construction costs in Q1 increased fixed assets by approximately $7 million.

When completed in Q3, we plan to vacate leased space adjacent to our headquarters building and move into the new building which will be 98% occupied on the first day.

In Q1 capitalized software decreased $4 million to $40 million due to quarterly amortization.

Our headcount on March 31st was 8,180, a decrease of 1% from Q4.

Turning to our outlook, as Craig described, the entire industry is facing a very cautious capital spending environment.

Predicting future financial results from this challenging environment is difficult.

While we continue to see strong demand from our broad sweep of pure internet PeopleSoft 8 solutions, our 2003 outlook is tempered by the continuing economic stagnation and geopolitical instability.

We anticipate capital spending will remain challenged for the remainder of the year and have taken a conservative view of our 2002 revenues as a result.

In Q2 we expect license revenue to be between $85 and $95 million and total revenue to be between $450 and 465 million.

On a recurring basis we expect our Q2 EPS to be between 11 and 12 cents.

In the coming quarter, we're expecting to take a non-recurring charge for facilities and head count as we adjust our worldwide operations to current expectations.

In Q2 we're expecting a modest headcount reduction of approximately 200 people world wide.

That reduction will be focused on various internal and administrative and support functions world wide.

We anticipate the costs associated with that reduction to be a[[approximately $4 million or a penny a share.

We are also consolidating our Bay area facilities by shutting down our Santa Clara facility and relocating those offices to our Pleasanton campus.

The Santa Clara facility currently houses less than 100 employees.

The cost of that shutdown is expected to be between $8-8.5 million in Q2 or approximately 2 cents a share.

We expect to shut down Santa Clara facility to reduce our operating expenses by approximately $1 million a quarter for the remainder of 2003 and 2004.

The combined impact of these activities is expected to be $12 million or 3 cents per share in Q2.

Including the one-time charge, we are expecting our Q2 EPS on a GAAP basis to be approximately 8 to 9 cents.

The remainder of 2003, we expect modest seasonality in our license revenues, our current expectations are for Q3 license revenues to be relatively flat to Q2 or $85-95 million and a modest uptick in Q4 to $125-135 million.

License revenue for the full year should be between $385-400 million.

Total revenue for 2003 should be approximately $1.9 billion.

On a recurring basis, 2003 EPS is expected to be in the range of 52-54 cents per share.

On a GAAP basis, including the one-time charge I just described, in Q2, our EPS should be 49 to 51 cents for the full year.

Finally we expect our tax rate to remain unchanged at 34.5% and our shares outstanding to remain relatively constant.

PeopleSoft is well positioned for growth when the economy does improve.

While Q1 was clearly impacted by the overall cautious spending environment, our overall fundamental strengths remain.

A broad product sweep comprised of products rich in features and functionality, loyal customers, highly dedicated employees and a healthy balance sheet.

PeopleSoft will continue to focus on excellent execution, increasing profitability and generating a positive cash flow.

Operator, we will now open the call up to questions.

At this time if you'd like to ask a question, press star one on your touch-tone phone.

You will be announced prior to asking your question.

Once again, to ask a question press star 1.

We would like to ask to limit one question per person.

Our first question comes from Jim Mendelson.

Thank you and please state your company name.

SoundView Technology Group.

Just a question on how you managed such a good earnings report in the face of such a sharp miss on the license side, and my quick calculation back in the envelope that license cost may be 9 cents in EPS and the question I have for you is, I doubt that you would have been able to -- or would have shown us 21cents in earnings had you made the other revenue number.

I'd love a little bit more color on how you managed to achieve such a high level of profitability in the face of such a sharp fall off that emerged late in the quarter.

Thanks.

Jim, it's Kevin.

One of the things we continue to focus on is our expenses overall, but more importantly it's important to note that every employee of PeopleSoft not on a commission plan has a quarterly bonus that is tied to our revenue and bottom line income and customer satisfaction.

If we're unable to achieve our top line and bottom line results, there's an immediate impact in terms of bonuses we pay everyone in the company from the senior management team on down and gives us a fair degree of control over our expenses.

The other thing that's important to note is we have taken a very conservative view of our profile for the quarter and had a lot of controls around our hiring and our expense posture was conservative, and that undoubtedly served us well in this environment.

If you were breaking up the license revenue shortfall across verticals, it sounded like you were saying the state and local government and education markets were harder at the market and certainly some of your peers?

Yeah, Jim.

Federal and state which is sometimes as high as 25% of our U.S. revenue was directly impacted.

The financial service industry also was an industry that was particularly hard hit in Q1.

Keep in mind that PeopleSoft is probably the leading provider of enterprise applications to the service industries in general, the service industries.

So, you know, whether it's financial services, communications which is banks or telecommunications industry, government industry state and local and federal, the healthcare industries, staffing, consulting industries, we're the lead provider to the service industry.

So the service industries, I think, were probably more impacted in general than specifically the federal, state and local governments and state universities, by the way. 40% of all university funding comes from the states and that has been also significantly hit by the budget deficits in all 50 states.

Thank you.

Our next question comes from Adam Holt, thank you and please state your company name.

Good afternoon.

It's Adam Holt from JP Morgan.

My two questions relates to services revenue and the associated expenses given your outlook for licensed revenue and the falloff from original expectations, what would you expect to see on the projectory for services for the next several quarters?

And along that line, could you break out what the services margin was distinct from maintenance in the current quarter?

Let me answer the questions in a reverse order, Adam.

We do not have a breakout we'll provide in terms of the relative margin contributions.

I think it's fair to say that the maintenance organization enjoys a higher gross margin than the professional services and you can see that when we describe the blended margin increasing this quarter as maintenance grew.

In terms of that, that's probably the easiest way to describe it.

In terms of the overall license revenue streams we are looking at, we are currently anticipating that for the full year we'll probably see a growth in maintenance in the 13-14-15% range for the full year and professional services remaining relatively unchanged for the full year, so that that's our current outlook.

Adam, if your question is would there eventually be an impact on the service revenue from any licensed revenue shortfall, I think the answer is, yes.

But the operative word is eventually.

The nice thing about a professional service component with PeopleSoft is that is implementation and training which is a lag to licensed revenue as long as 9-12 months.

If you recall in the last time PeopleSoft had any revenue decline was in 1999 and we still saw during a period of more than 12 months professional service continued to grow as licenses that were deployed, licenses that were deployed were implemented and training occurred.

We see that same factor continuing.

On top of that, professional services is a growing industry at PeopleSoft notwithstanding license revenue growth.

More companies where customers like to have the software vendors implementation team on site, either as an alternative to the systems integrators or more frequently in conjunction with or cooperation with the systems integrators.

It's just a good overall policy.

That's become just a trend for PeopleSoft and by the way SAP and [INAUDIBLE] as well.

So, you know, that is providing uplift to professional service organization over time as well.

Safe to say given the sequential license revenue decline we've seen December to March, we should expect to see a similar trajectory call it 9-12 months from now.

My original hypothesis back in 1999 and 2000 was the answer was yes.

It didn't turn out to be the case where you see a trough that would be almost like a wave that went by of license revenue.

We didn't see it.

The only thing I can attribute that to is people slow down their spending on license, continue their implementation.

When the license enthusiasm returns, they're maybe more anxious to implement than they are to slow down and that's the only explanation I can give you.

I would just point to the data to convince you that I'm not just making up a story here.

The fact is, the last time we went through any kind of license revenue downturn, there was no professional service downturn that you would expect 9-12 months later.

So it doesn't seem to work in both directions but rather it's an insulater, a shock absorber in the software industry.

Thanks for your help.

Our next question comes from Eric Upin.

Thank you you may ask your question and please state your company name.

Eric from Wells Fargo Securities following up on the services question.

First, can you comment on any billing rate pressure or less in demand as companies want to do more implementations themselves with more available IT staff and how that secondly flies in the face of very high service margins, following up on Jim Mendelson's question.

I'm a little confused to see how high those margins could be if you could comment on how the utilization or comment on such a high end of service margins since it seems you've been guiding those gross margins down in the last couple of quarters and what the guidance is moving forward.

Lastly, on services how you are managing the third-party relationship since it does seem like it's tough on the services side?

How the third-party relationship is working out and how you are balancing demand to do some of the work yourself versus partners.

Eric, the margins in our professional service business are unusually high.

No doubt about it.

They are high because we have an enormously high utilization rate and almost no bench, we almost have no bench right now which is, I'm sure you know how many consultants are not available, just sitting around.

There are very few.

And the combination of the utilization rate and no bench means that we can charge more than if we had low utilization and a high bench.

So the average hourly cost per PeopleSoft consultants is very high comparatively speaking.

And so that's the answer to the question.

You are absolutely right that the service, professional service industry is under significant pricing pressure.

But since it is not our main line of business and we keep our benches so low we have not had to discount our professional service rates as much as we would otherwise have to.

The second part of your question was, how do you balance the relationship with professional service partners?

The implementation companies, you know it's -- it doesn't turn out to be as high a conflict as you might think because the total number of consultants PeopleSoft has is a very, very small percentage of all PeopleSoft consultants in the world.

Our strategic partners, our system's implementation partners have in some cases doubled or tripled the number each that PeopleSoft has.

We are not a major irritant because the total number of people is small.

Secondly, we don't try to project manage and offer PeopleSoft professional services as an alternative to IBM or Cap Gemini or Accentra.

We simply offer PeopleSoft professional services as a compliment on site on every engagement to every what we call a small footprint usually 15-20%.

So I think the systems integration partners don't view it as competively as you might think because of the magnitude of it and the role that we promote to play or proport to play which is just a supplemental consultants on every engagement.

Then if you can give us any commentary on what we should expect.

Obviously this was an unusual quarter.

Service margins moving forward and should we be thinking and confirm your commentary as the low 50s is the way to be thinking about it in the next several quarters in terms of gross margins?

We think it's probably closer to 54-55%.

I had been describing 51 and 52.

Every time I said it would come down it came up.

So I stopped describing it as coming down to that level.

The reality is the business is running very well.

The mix in terms of the maintenance component is a relatively high margin business.

The blended margin is helping out plus the cost management on the professional services side.

So we're thinking 54-55% is the right blended margin moving forward.

The upside of that business for us this year is probably expansion internationally.

We don't have the same professional service balance outside the U.S. as we had inside the U.S. so that represents an opportunity to PeopleSoft if we were to improve the percentage of our revenue in professional services outside the United States to the level inside the United States, it would represent a significant upside for professional service.

These are a lot of dials that we can play with as we run the business going forward and some of them actually represent an upside as the year goes on versus downside.

Thanks.

Our next question comes from David Hilal.

Thank you, you may ask your question and please state your company name.

Thank you.

Friedman, Billings Ramsey.

First, can you share us the number of transactions on both the CRM and supply chain side?

I don't have that number committed to memory.

Do you know what the numbers were?

I have it here.

Hold on.

David, why don't you ask another question and we'll get that answer for you.

Great.

I wanted to dig a little deeper on your guidance and understand the assumptions behind that license guidance for this year.

I understand the commentary that things aren't getting better but if you look at that license number, it's about 25% less than last year and last year was tough as well.

So is the assumption that this year is going to be much more difficult than last year?

It goes against the general consensus.

If you believe that, what are you seeing different than others?

I'm not sure that the general consensus before or after 26 software companies preannounced is maybe part of the question behind that.

We've got one data point for 2003 so far and it shows us license revenues are going to be very, very challenging.

We've taken a conservative assumption with regard to that and predicted modest seasonality moving forward to reflect that in the change from quarter to quarter.

Would we like to see a recovery of 2002 levels and beyond?

Certainly but we don't have enough data at this point to build a business plan based on that.

The other thing, does anybody think that's sitting here today, the outlook for 2003 is better than it was twelve months ago?

There's no criteria you can point to or none that we have seen or felt that says that there is more room for optimism this year than last year at this time.

So, you know, any assumption that it exists would just be hope.

We would rather go on the facts and the facts are at best mixed.

And for those more conservative, are not mixed.

I would agree that this year doesn't look better than last year.

My point was such a big decline when I read into it is you guys are forecasting this year to be a lot worse as opposed to on par to last year.

Well, it started out worse.

We're going on the information that we have.

There's not a lot of dials in the software company other than pipeline and conversion rate.

The good news is the pipeline continues to grow which seems to indicate a reservoir of demand that continues to rise and conversion rate that continues to go down.

The pipeline that remains flat or stagnant or go down, then we would have a different situation and be positioning and posturing differently.

The conversion rate is tremendously under pressure.

Name an industry that you feel is not in a retraction mode.

Where capital spending is going forward.

It's hard to do.

So we are going with the data we have and assuming a conversion rate, you are correct we are assuming a conversion rate that does not improve and should that rate improve, and, by the way, nobody would be happier than us here to see that.

It should all be upside to PeopleSoft's business plan.

The answer to your first question, 79 transactions that were supply chain and manufacturing, 56 transactions that were customer relationship management.

Great.

Thanks, guys.

Next question comes from Tad Piper.

Thank you, you may ask your question and state your company name.

Tad from Piper Jaffray.

I understand the objectives in terms of expanding the business internationally on the services side and put that into two sides.

One is the offering of services internationally.

Most of your competitors says that services business internationally generally has lower overall margins and that that's one side of it.

Can you talk us through a little bit, the timeline in your plans on moving more of your service organization and to what extent you intend to do that to India?

I think those are two great questions put together.

I think the margin in certain international theaters is less.

Latin America springs to mind.

And I think the answer to that is either be a victim of it or try to take steps yourself.

And one of the steps we try to take ourselves like others, by the way, is to increase our resources in India that are implementation resources.

We already have a development center in India which we continue to grow quarter to quarter.

We have started a number of resources in India for implementation and those offer a lower cost vehicle to PeopleSoft.

What we are hoping to do is as we improve the amount of implementation business to do overseas, we are able to maintain healthy margins through the lower cost of Indian-based implementation resources so that's pretty much the strategy at this point.

I guess part of the question also was the timing, how aggressively are you either in hiring in India?

We're going to have an announcement in the next 30-60 days regarding our Indian facility.

We have had a facility there for the last, I guess, year to year and a half that has been successful for us in the development of our products, the maintenance of our products.

We have started a facility implementation and I don't think we've gone public from the marketing point of view to the magnitude of that or the timing.

I don't mean to be evasive, I don't want to make my chief marketing officer angry with me that I've done the launch of our Indian implementation company on the earnings call instead of the leadership summit or later.

Okay.

Not to beat this one, would that be mostly hiring or possibly acquisition in India?

Initial implementation, Kevin.

Probably an outsourced activity with an option to bring it inhouse at a later date.

In a separate area, on the product cycles, my understanding is we have a number of releases related to supply team management ads particularly over the summer.

Can you give us more color on what we might expect to see after that and whether you have plans timing wise of PeopleSoft 9?

Trying to make the marketing people mad, aren't you, Tad.

I'm working on it.

We have a leadership summit coming up in Las Vegas in a couple of weeks, we'll have more commentary on our products.

That's a great platform for us to announce intentions in supply chain and CRM and financials and human capital management.

One of the things powerful about PeopleSoft is whether the economy is good or bad we are always able to develop new products and new products are part of you know it's a major artery or vein to bring out new products, it gives you the ability to continue revenue growth and license revenue growth.

So we'll have discussions and press released around the leadership in all these areas.

Management, by the way, of all of our product lines is probably the only standout in Q1 that is growing in the face of everything else declining.

Supply chain manufacturing is an area that PeopleSoft has never had the visibility that we think it deserves.

We in Q1 have very major wins against the two more visible players in manufacturing.

By the way, I'm not referring to [INAUDIBLE] and supplier relationship management, I'm talking about manufacturing, hard manufacturing wins.

This may be, you know, the longest baby that's ever been delivered going on about five years now that we've been committed to manufacturing.

It looks like at least for the pipeline and some of the wins we had that we are finally gaining strong play in the manufacturing area.

Okay, thanks.

Our next question comes from Neil Herman.

Thank you, you may ask your question and please state your company name.

Hi and good evening.

Neil Herman, Lehman Brothers.

I wanted to get your sense as to what you saw in terms of conversions to PeopleSoft 8 in the quarter and willingness of customers to make incremental purchases as they've gone through that.

Was there any change from that perspective?

Neil, my observation is that the feedback to -- from customers who migrated to PeopleSoft 8 continues to be enormously gratifying to PeopleSoft.

Normally when a customer migrates from one major version to another, particularly if there's an architecture change, there's some pain or bruising along the way.

The feedback to me as I travel around has been universely positive.

The ability to purchase add-on modules whether with the upgrade to PeopleSoft 8 or having already implementing PeopleSoft 8 slowed down.

Everything slowed down in Q1.

We may -- or not may, probably deferred some of the ad-on products that normally come from the upgrade of the suite.

If I could snap my fingers and have every customer running PeopleSoft 8 tomorrow I would do it.

Because once a customer is running PeopleSoft 8, it opens up dozens and dozens of product that they can't run on version 75.

We have 35 new products alone last year that were new.

None of them run on PeopleSoft 7.5.

We get a audience more capable of spending license revenue with us if they're on 8 so that's why we've had such a push to get the customer base converted.

The short answer to your question is ad-on products were delayed along with the larger deployments as well.

As a follow-up on a separate question, your revenue line was up substantially this quarter.

Can you talk about that and what your expectations are in terms of deferred revenue over the next couple quarters?

The deferred revenue was up by I think about $26 million overall, actually it was up by $26 million overall.

The majority of that, in fact 100% has been deferred maintenance.

There is seasonality with deferred maintenance.

It follows contract anniversary dates.

We'll see general seasonality moving from Q2 to Q3 for example and then Q4 much as we saw last year and the year before that.

The general trend overall is our expectation the deferred revenue continues to increase by modest amounts as the overall maintenance revenue stream continues to increase.

The two are directly related.

Thank you very much.

Our next question comes from Brad Thill.

Thank you, you may ask your question and please state your company name.

Prudential.

The 40-50 million of license that slipped into Q2, is it fair to characterize those as negotiations where you were selected as the better choice or forced to open up the competition into this quarter as well.

Our general feeling is in order to be including it in our expectations it had to be a pretty advanced stage of negotiation in our sales process.

A large portion are customers that have already identified PeopleSoft as their preferred provider and so it's our expectation and hope that we are not reopening those negotiations and we'll obviously know the answer to that at the end of the quarter.

One of the reasons it's hard to anticipate a conversion rate in this economy is I'm not sure that the parties we negotiate with are themselves capable of knowing in the end whether they can do the deal.

I said this on a couple of prior quarters, a remarkable number of these capital expenses require board approval today.

Board approval.

A CIO or CFO that could have signed for a $3 million project, you know, in $1.5 million in software, $1.5 million in implementation, you know even if -- they know they have to go to higher approval at least the CEO level, sometimes board approval but don't know their success rate.

A common refrain a couple days after the quarter was there was nothing I could do.

I thought that this was going to be a pretty routine approval and it didn't turn out to be.

I will try to get this resubmitted next month.

That wasn't from low level managers.

That was from CFOs and CIOs.

I think there's a predictability issue internally at customers that is hard in some cases for even them to call.

Because I can assure you that the forecast was well in excess of $81 million going into the last few days of the quarter.

Well in excess.

And a quick follow-up, Craig, you mentioned supply chains as the only standdown in terms of product line SAP had reported a decline in HR and financials, did you see that same decline in that product category?

Supply chain, this is Kevin, the supply chain Craig described as a relative standout.

It was challenging everywhere.

Supply chain probably saw it, the lowest sequential decline, in fact supply chain revenues may have been close to flat but below expectations, certainly.

Supply chain revenues are relatively flat moving from Q4 to Q1.

Everything was down except supply chain management which was up very slightly.

But there wasn't a product line standout other than -- positively or negatively with the exception of supply chain from a positive point of view.

Everything else was reduced like I said with a ruler.

You could have plotted it with a ruler in a straight line in terms of the consistency in which all product lines declined.

Thank you.

Our next question comes from Heather Bellini.

Thank you, you may answer your question.

Hi, Heather Bellini at UBS.

The first of those deals, the $40 to $50 million that you saw push out of the first quarter, if you have seen any of these close or are you still seeing hesitancy there and then I have a quick follow-up.

The deals pushed, we wouldn't have expected much to close in the beginning of a new quarter.

That's generally not the way the process works.

We haven't tracked material progress against that but we wouldn't expect that to happen.

Okay, and are these deals potentially -- from Craig's comment a few minutes ago, it sounds like you are uncertain as to whether or not they will close the quarter which is why they are not in your guidance for the current quarter.

Is that how we should assume that?

The comment I was making was really directed to whether we've been selected or reopened negotiations or selection criterion.

It is absolutely selected.

Nobody said I wasn't able to get this done because my board wants to go back and look at oracle or SAP.

This was simply an ability to get it done so I think it remains an ability to get it done.

We have -- if we wanted to take an optimistic view and assume closure of those things which slipped out of the last 48 hours of last quarter, combined with a conversion rate consistent with the quarter on a pipeline that continues to grow, the numbers would certainly look even better.

We're trying not to spin ourselves.

We're trying to face reality that conversion rates continue under pressure.

There is plenty of reason to think they may improve.

The geopolitical situation is resolving.

If you look at the earnings announcements in the last ten days, more have met or exceeded earnings projections than have not.

There's plenty of ways to connect the dots and come out positive.

But it's all interpretational.

Until we have an update to base it on, we'll try to invest at the same time and with cutting back expenses on a plan that continues to show extremely high profitability, extremely good cash flow.

Extremely good balance sheet and wait to be heroes.

And actually two follow-ups.

One, can you comment on SAP on their earnings call last week that they saw improvement in the U.S. in the first quarter and the question is how do you think they solved the improvement, is it due to better execution or market share shift going on?

And secondarily, in response to your guidance for fourth quarter license revenue, it looks like if I took the mid-point of your third quarter range and the mid-point of your fourth quarter range, it's up about 35-40% which seems like it's a lot higher than what your normal 4Q seasonality is by almost a factor of 2.

On the SAP question, a lot of slight of hand going on with SAP.

This is a company that guided to almost Draconianly low expectations.

This is a company that announced sequential license revenue down 63%.

Sequential service revenue down 11%.

Sequential total revenue down by a third.

Sequential operating income down by 62%.

Sequential earnings down by 24 cents a share.

That happened to have been better than they guided.

But in all other aspects was the steepest decline of any enterprise software company.

They always have that type of seasonality in the first quarter which is why people weren't as disappointed.

It's a miracle-type story.

They do so much of their revenue in Q4 you never know throughout the year how they are going to do.

So I guess the question is whether SAP as a last two or three-year history has been able to pull out an entire year in a single quarter.

Certainly the ramp historically that you're mentioning relative to PeopleSoft is probably a bit larger percentage wise than normal.

But as I said in my remarks, there's an assumption of modest seasonality.

As you look at Q4s as we have done in the last four or five years, certainly $125-135 million would be probably the lowest Q4 we've had in four or five years.

Modest assumption of improvement still 3/4s out with a number that still stands out for how low it is historically.

So you're looking at it from an absolute license revenue standpoint as opposed to a percentage.

Yeah.

When you look at the last four Q4s and you'll feel better about that number even though from a percent point of view, it's a percent off admittedly low numbers.

Thank you very much.

Our next question comes from Kash Rangan.

Thank you, you may ask your question.

Thank you very much.

Craig and Kevin, just wondering if you look at professional services, just trying to get a look at the sustainability of the professional services revenues, more specifically consulting if you look at the next couple of quarters.

If you look at '99 and 2002, the two years declining revenues, one would argue that '99 you saw some post Y2K or lingering impact of Y2K that helped your consulting business. 2002 one would argue that you are still going through an early phase, an upgrade cycle or the latter end. if you look at 2003, what help, what are the driving factors that help you sustain your consulting revenues?

And I have a follow up question.

Thanks.

1600 customers currently implementing PeopleSoft, at 1500 yet to start.

A growing desire on customer's parts to have software vendors on site during the implementation so I guess the percent footprint of PeopleSoft going up at the customer's request.

Those are some of the international growth and consulting which we have a reason to believe is progressing nicely.

These are all factors which imply to us or convince us that the professional services revenue will continue to sustain for, you know, certainly the remainder of 2003 and probably well into 2004.

Final factor would be additional products. 35 new products being released in 2002, there is a lot of upsell to customers that can drag along work as well.

Keep in mind our 2001 and 2000 license revenue over that two-year period of time was pretty good growth.

I think we will continue to see the benefits of that.

Probably have time for one last question.

Okay.

Our final question comes from Cameron Seals.

Thank you, you may ask your question and please state your company name.

Thanks, RBC Capital Markets.

Craig, just a couple quick questions on the government business, specifically the federal government.

Will you comment on what you saw in the last two weeks of March in terms of federal procurement processes and if there is substantial disruptions during that period of time?

And the follow-up to this is ,it's been I think the government said they planned spending 10% growth year over year on IT products and services, are you guys going to see that benefit or maybe comment on your outlook for the federal government going into additional spending and homeland security spending here in the next couple of quarters.

Let me start with the general position we enjoy in the federal government, it is very, very strong.

I believe we are still the largest provider of enterprise software to the U.S. federal government.

We have large contracts with virtually every federal agency as the Department of Homeland Security was consolidated.

PeopleSoft was one of the few products used by every agency that was consolidated in the Department of Homeland Security.

We signed a huge, a significant multi-year deal with the Department of the Navy, the Department of Defense that was significant and was a multi-product line deal.

So in general we feel like we are poised to enjoy a disproportionate amount of the benefit from increased federal spending.

In Q1, the preoccupation was on procuring what we -- I think in the federal government is called beans and bonds.

Supplies and weaponry for the Iraq war there just wasn't any mind share left over.

As that mind share returns, we hope to, you know, get the benefit of that.

I get back to my comments, in my experience in enterprise software which is going on more than 25 years, you don't see a lot of technology spending that goes away.

You normally see technology spending as deferred.

It can be deferred a month, it can be deferred a year.

Technology spending typically is more like a stream of water than a light switch that is turned on and off and so from that point of view, I think PeopleSoft and frankly our competitors to be honest with you, are all in a advantageous position.

The professional service business that we have and the maintenance business we have is more of an annuity than almost any service organization out there.

And I think license revenue will rebound when the taste for capital spending improves.

Craig, are you seeing any of that mind share return within the federal government since March.

Any indications of that been proven?

It's hard for me to say because the conversation has improved.

The federal government is a complex and arduous cycle.

The good news is that the dialogue has returned, the bad news is that's probably one of 25 steps that is necessary to eventually get through.

You didn't ask but it's an interesting answer, so I'll give it to the question you didn't ask.

Federal spending is probably a level of return sooner than state government.

State governments are facing enormous deficits.

They have little alternative than to cut back.

The federal government has a taste for spending on technology that will continue and is probably shorter to realize than the state government.

You know if I had to pin my hopes on one of the government spending vehicles, it would be federal.

If there was one I was worried about it would be state.

The dialogue is improving to answer your question.

Thanks a lot.

Thank you, everyone, for attending our Q1 earnings release conference call.

We look forward to speaking to you about our Q2 results in July.