Investors are just waiting for a reason to sell any technology stock and PeopleSoft gave it to them.
Claiming weaker than expected licensing sales, PeopleSoft told Wall street it will miss its estimates of $160 million in sales for its first quarter. Instead, the Pleasanton, Calif.-based software company warned it expects to make 14 cents a share for the quarter on license revenue of between $130 million and $135 million.
According to Thomson Financial/First Call, analysts expected PeopleSoft to earn 15 cents a share.
"Although consulting revenue and maintenance revenue were on plan, and earnings per share are expected to meet our original guidance, license revenue clearly reflected a cautious economic environment," said PeopleSoft Chief Executive Craig Conway in a statement.
The news sent investors clamoring to sell and the stock dropped $10.17, or 27 percent, to $27.24, in early trading on Tuesday. In the morning hours alone more than 38 million shares of PeopleSoft stock were traded, which represents more than four times the stock's average daily volume.
Along with investors, analysts are reevaluating their opinions on PeopleSoft. Goldman Sachs cut its rating on the company's stock to "market outperform" and reduced financial estimates for 2002 and 2003.
The news had a rippling effect on other large software vendors such as Microsoft, Oracle, Siebel Systems, all of which were lower.
However, despite the large drop in PeopleSoft's stock price, some analysts are not worried and instead view it as a buying opportunity.
Jim Mendelson, an analyst at SoundView Technology Group, maintains his strong buy on PeopleSoft. "While we are disappointed, we see the miss more as evidence of the difficult spending climate than an indication of a serious execution problem," says Mendelson in a research report filed early Tuesday morning. "We have cut our license revenue estimates for the remainder of the year from $575 million to $530 million, and lowered our 2002 EPS estimate from $0.75 to $0.70."
But a tough economy as the main reason for missing Q1 numbers falls short of a larger explanation. Why? Because, as other ERP vendors stumbled last year due to the difficult spending environment, "PeopleSoft seemed to be defying gravity," says Mark Verbeck, principal at financial research firm Think Equity Partners. At the Line56Live! Conference in New York last year, Verbeck warned that expectations for the high-flying software developer were being severely mismatched with reality -- and today's news proves him right.
According to Verbeck, PeopleSoft's poor Q1 2002 estimates are a culmination of a series of events starting with PeopleSoft 7. "PeopleSoft realized the market was difficult and thus stopped rolling out upgrades, freezing people on PeopleSoft 7," says Verbeck, adding that revenues were miserable during this period. "When PeopleSoft came out with a brand new Web architecture in PeopleSoft 8, the starved installed base jumped on it. That artificial lift and pent up demand is subsiding, and PeopleSoft must now compete in the same environment with other ERP vendors."
PeopleSoft's 'artificial lift' strategy catapulted the company to the fore, making people believe that PeopleSoft was somehow vastly different. "It was a smart thing for them to do," Verbeck says. And despite the scaled-back Q1 expectations, Verbeck contends PeopleSoft is still well-positioned because of its superior architecture.
Additional reporting by Tom Kaneshige. David Myron and Tom Kaneshige also write for Line56.com