<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______.
Commission File Number: 0-20710
PEOPLESOFT, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0137069
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4440 Rosewood Drive, Pleasanton, CA 94588-3031
(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code:
510/225-3000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
CLASS OUTSTANDING AT SEPTEMBER 30, 1997
----- ---------------------------------
Common Stock, par value $.01 110,999,238
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PEOPLESOFT, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of December 31, 1996 and September 3
30, 1997
Condensed Consolidated Statements of Income for the Three Months Ended
September 30, 1996 and September 30, 1997; and Nine Months Ended September 4
30, 1996 and September 30, 1997
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1996 and September 30, 1997 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2 - Management's Discussion and Analysis of Financial Condition and 8
Results of Operations
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings 23
ITEM 2 - Changes in Securities 23
ITEM 3 - Defaults upon Senior Securities 23
ITEM 4 - Submission of Matters to a Vote of Security Holders 23
ITEM 5 - Other Information 23
ITEM 6 - Exhibits and Reports on Form 8 - K 23
SIGNATURES 24
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PEOPLESOFT, INC.
----------------
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 169,875 $ 222,369
Short-term investments 27,138 98,034
Accounts receivable, net 163,676 258,218
Deferred income taxes 28,246 20,294
Other current assets 7,703 10,191
--------- ---------
Total current assets 396,638 609,106
Property and equipment, at cost 140,279 179,108
less accumulated depreciation and amortization (43,581) (69,271)
--------- ---------
96,698 109,837
Investments 18,270 25,303
Deferred income taxes 13,302 13,302
Capitalized software, less accumulated 11,173 9,747
amortization
Other assets 3,999 8,638
--------- ---------
$ 540,080 $ 775,933
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 47,128 $ 48,936
Accrued compensation and related expenses 37,681 58,611
Income taxes payable 18,771 26,308
Deferred revenue 183,252 283,816
--------- ---------
Total current liabilities 286,832 417,671
Stockholders' equity:
Common stock 1,076 1,110
Additional paid-capital 162,691 200,691
Accumulated foreign currency translation adjustment (89) (1,283)
Retained earnings 89,570 157,744
--------- ---------
253,248 358,262
--------- ---------
$ 540,080 $ 775,933
========= =========
</TABLE>
See notes to condensed consolidated financial statements
3
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PEOPLESOFT, INC.
----------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1997 1996 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License fees $ 67,121 $112,977 $167,687 $293,418
Services 50,261 104,073 134,698 261,662
-------- -------- -------- --------
Total revenues 117,382 217,050 302,385 555,080
Costs and expenses:
Cost of license fees 2,727 6,113 8,274 15,440
Cost of services 32,510 59,805 80,425 158,350
Sales and marketing 35,478 61,495 93,655 155,967
Product development 18,950 34,851 49,611 89,689
General and administrative 7,004 10,978 17,883 30,548
-------- -------- -------- --------
Total costs and expenses 96,669 173,242 249,848 449,994
-------- -------- -------- --------
Operating income 20,713 43,808 52,537 105,086
Other income, principally interest 1,252 2,480 4,327 6,955
-------- -------- -------- --------
Income before taxes 21,965 46,288 56,864 112,041
Provision for income taxes 8,786 17,589 22,746 43,233
-------- -------- ======== ========
Net income $ 13,179 $ 28,699 $ 34,118 $ 68,808
======== ======== ======== ========
Net income per share $ 0.11 $ 0.23 $ 0.29 $ 0.55
======== ======== ======== ========
Shares used in per share computation 120,689 126,915 119,033 125,122
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements
4
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PEOPLESOFT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1996 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 34,118 $ 68,808
Adjustments:
Depreciation and amortization 18,885 28,673
Provision for allowances 1,826 6,935
Provision for deferred income taxes (7,344) 7,952
Changes in operating assets and liabilities:
Accounts receivable (45,910) (101,477)
Other current assets and non-current assets (3,381) (3,635)
Accounts payable and accrued liabilities 15,643 1,808
Accrued compensation and related expenses 12,559 20,930
Deferred revenue 55,666 100,564
Income taxes payable 6,435 7,537
Tax benefits of employee stock transactions 7,025 9,343
--------- ---------
Net cash provided by operating activities 95,522 147,438
INVESTING ACTIVITIES
Purchase of investments (29,157) (127,971)
Sale of investments 15,912 50,044
Purchase of property and equipment (42,340) (38,829)
Additions to other assets (8,415) (4,190)
Additions to capitalized software, net (1,494) (1,557)
--------- ---------
Net cash used in investing activities (65,494) (122,503)
FINANCING ACTIVITIES
Net proceeds from issuance of common
stock, primarily from stock options 14,553 28,753
--------- ---------
Net cash provided by financing activities 14,553 28,753
Effect of foreign exchange rate changes on cash 171 (1,194)
--------- ---------
Net increase in cash and cash equivalents 44,752 52,494
Cash and cash equivalents at beginning of period 90,682 169,875
--------- ---------
Cash and cash equivalents at end of period $ 135,434 $ 222,369
========= =========
</TABLE>
See notes to condensed consolidated financial statements
5
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PEOPLESOFT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
1. BASIS OF PRESENTATION
The information at September 30, 1996 and 1997 and for the three and
nine month periods then ended is unaudited, but includes all adjustments
(consisting only of normal, recurring adjustments) which the Company's
management believes to be necessary for the fair presentation of the financial
position, results of operations, and changes in cash flows for the periods
presented. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. Despite management's best effort to
establish good faith estimates and assumptions, and to manage the achievement of
the same, actual results may differ.
The accompanying interim financial statements should be read in
conjunction with the financial statements and related notes included in the
Company's Annual Report to Shareholders (Form 10-K) for the year ended December
31, 1996. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission rules and regulations. Interim results of operations for
the three and nine month periods ended September 30, 1997 are not necessarily
indicative of operating results for the full fiscal year.
2. EARNINGS PER SHARE
Net income per share is computed on the basis of weighted average number
of shares outstanding plus common stock equivalents, consisting of outstanding
dilutive stock options and warrants (using the treasury stock method). Fully
diluted per share amounts are not presented, as the effect is not material. In
November 1996, the Company's common stock was split two-for-one. All shares,
common stock equivalents, and per share amounts applicable to prior periods have
been restated to reflect the stock split. All shares and per share amounts do
not reflect the stock split to be effected on December 5, 1997 as discussed
further below. The computation of the weighted average number of shares
outstanding for the three and nine month periods ended September 30, 1996 and
1997 follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares:
Common stock 106,659 110,505 105,396 109,370
Common stock equivalents 14,030 16,410 13,637 15,752
------- ------- ------- -------
120,689 126,915 119,033 125,122
======= ======= ======= =======
</TABLE>
In February 1997, the Statement of Financial Accounting Standards No.
128 "Earnings per Share" (FAS 128), was issued and is effective for the year
ending December 31, 1997. The Company will change its method for computing
earnings per share and restate all periods to reflect the change in its
consolidated statements of income, effective with the issuance of the Company's
fourth quarter and annual report for 1997. The new method requires calculation
of earnings per share excluding the dilutive effect of common stock equivalents
such as stock options and warrants. The impact of the new requirements is
expected to increase earnings per share for the quarters ending September 30,
1996 and 1997 by $.01 and $.03, respectively, and $.03 and $.08 for the nine
months ended September 30, 1996 and 1997, respectively. The impact of FAS 128 on
fully diluted earnings per share is not expected to be material.
During the fourth quarter of 1997, the Company anticipates issuing
approximately 475,000 shares of common stock pursuant to the exercise of
outstanding warrants. The Company does not anticipate the exercise of the
warrants to materially effect the weighted average number of shares
outstanding.
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3. ACCOUNTS RECEIVABLE
Accounts receivable is comprised of billed receivables arising from
recognized and deferred revenues, and unbilled receivables, which include
accrued license fees, accrued services, and deferred services. The principal
components of accounts receivable at December 31, 1996 and September 30, 1997
were as follows (in thousands):
DEC. 31, SEPT. 30,
1996 1997
--------- ---------
Billed receivables $ 94,343 $ 166,426
Unbilled receivables 76,756 106,150
--------- ---------
171,099 272,576
Allowances (7,423) (14,358)
--------- ---------
$ 163,676 $ 258,218
========= =========
4. DEFERRED REVENUE
Deferred revenue is comprised of deferrals for license fees,
maintenance, training and other services. The principal components of deferred
revenue at December 31, 1996 and September 30, 1997 were as follows (in
thousands):
DEC. 31, SEPT. 30,
1996 1997
-------- --------
License fees $ 34,224 $ 65,241
Maintenance 104,257 155,572
Training 30,607 39,578
Other services 14,164 23,425
-------- --------
$183,252 $283,816
======== ========
5. CAPITALIZED SOFTWARE
The Company capitalizes certain software acquired from third parties and
certain costs incurred internally in developing its software products. As
discussed in Note 1 of the Notes to the Consolidated Financial Statements in the
Company's Annual Report to Shareholders (Form 10-K) for the year ended December
31, 1996, the establishment of technological feasibility and ongoing assessment
of recoverability of capitalized software development costs and the cost of
purchased software require considerable judgment by management with respect to
certain external factors including, but not limited to, anticipated future
revenues, estimated economic life and changes in software and hardware
technologies. Software amortization charges related to capitalized software
amounted to $1,536,000 and $2,983,000 for the nine months ended September 30,
1996 and 1997, respectively. Capitalized software costs and accumulated
amortization at December 31, 1996 and September 30, 1997 were as follows (in
thousands):
DEC. 31, SEPT. 30,
1996 1997
-------- --------
Capitalized software:
Internal development costs $ 10,737 $ 12,294
Purchased from third parties 6,832 6,832
-------- --------
17,569 19,126
Accumulated amortization (6,396) (9,379)
-------- --------
$ 11,173 $ 9,747
======== ========
6. BUSINESS COMBINATIONS
During the quarter ended September 30, 1997 the Company acquired all of
the outstanding shares of Campus Solutions, Inc. in exchange for 210,000 shares
of its common stock, and the assets of Salerno Manufacturing Inc. in exchange
for 80,645 shares of common stock. These transactions were both accounted for as
pooling of interests. Additionally, the Company acquired TeamOne, LLC. in
exchange for $4,000,000 cash. The aggregate effect of the three acquisitions was
immaterial to the financial position and results of operations for the quarter
and prior periods.
On October 16, 1996 the Company merged with Red Pepper Software Company
("Red Pepper"). The merger was accounted for as a pooling-of-interests and the
historical consolidated financial statements of the Company for periods prior to
the merger have been restated to include the financial position, results of
operations and cash flows of Red Pepper. See Note 10, "Business Combinations",
in the Notes to the Consolidated Financial Statements in the Company's Annual
Report to Shareholders (Form 10-K) for the year ended December 31, 1996.
7. SUBSEQUENT EVENT
On November 11, 1997, the Company announced a two-for-one split of its
common stock. The stock split will be effected as a stock dividend on December
5, 1997 for all shareholders of record on November 21, 1997. The stock split
will increase the number of shares of common stock outstanding from
approximately 127,000,000 to 254,000,000. The accompanying condensed
consolidated financial statements do not reflect the retroactive effect of the
stock split planned for December 5, 1997.
7
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Discussion and Analysis of Financial Condition and Results of
Operations contains descriptions of the Company's expectations regarding future
trends affecting its business. These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Please read the section below titled "Factors That May Affect Future
Results" to review conditions which the Company believes could cause actual
results to differ materially from those contemplated by the forward-looking
statements. Forward-looking statements include, but are not limited to, those
items identified with a bold footnote 1 symbol. The Company undertakes no
obligation to update the information contained herein.
RESULTS OF OPERATIONS
During October 1996, the Company completed a merger with Red Pepper Software
("Red Pepper") accounted for as a pooling-of-interests. All financial data
presented herein has been restated to include the financial position and results
of operations of Red Pepper. The following table sets forth, for the periods
indicated, the percentage of total revenues and the percentage of period over
period growth represented by certain line items in the Company's consolidated
statements of income:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------
PERCENTAGE OF
TOTAL REVENUES
PERCENTAGE OF
DOLLAR INCREASE
1996 1997 YEAR OVER YEAR
- ----------------- ------------------- ----------------
<S> <C> <C> <C>
Revenues:
57% 52% License fees 68%
43 48 Services 107
--- ---- ----
100 100 Total revenues 85
Costs and expenses:
2 3 Cost of license fees 124
28 28 Cost of services 84
30 28 Sales and marketing 73
16 16 Product development 84
6 5 General and administrative 57
--- ---- ----
82 80 Total costs and expenses 79
--- ---- ----
18 20 Operating income 112
1 1 Other income 98
--- ---- ----
19 21 Income before taxes 111
8 8 Provision for income taxes 100
=== ==== ====
11% 13% Net income 118%
=== ==== ====
</TABLE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
- ------------------------------------------------------------------------------------------
PERCENTAGE OF
TOTAL REVENUES
PERCENTAGE OF
DOLLAR INCREASE
1996 1997 YEAR OVER YEAR
- ----------------- ------------------- ----------------
<S> <C> <C> <C>
Revenues:
55% 53% License fees 75%
45 47 Services 94
--- ----- -----
100 100 Total revenues 84
Costs and expenses:
3 3 Cost of license fees 87
27 29 Cost of services 97
31 28 Sales and marketing 67
16 16 Product development 81
6 5 General and administrative 71
--- ----- -----
83 81 Total costs and expenses 80
--- ----- -----
17 19 Operating income 100
2 1 Other income 61
--- ----- -----
19 20 Income before taxes 97
8 8 Provision for income taxes 90
=== ===== =====
11% 12% Net income 102%
=== ===== =====
</TABLE>
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A substantial portion of the Company's cost structure is
employee-related. The breakdown of employees by functional area is as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
EMPLOYEE COUNT TOTAL EMPLOYEES
PERCENTAGE OF
INCREASE
12/31/96 9/30/97 12/31/96 9/30/97 SINCE 12/31/96
-------- ------- -------- ------- --------------
<S> <C> <C> <C> <C> <C>
1,072 1,830 Services 43% 47% 71%
665 920 Sales and marketing 27 24 38
517 808 Product development 21 20 56
236 346 General and administrative 9 9 47
---- ----- ---- ---- --
2,490 3,904 Total 100% 100% 57%
===== ===== ==== ==== ==
</TABLE>
REVENUES
The Company recognizes license fee revenues when a non-cancelable
license agreement has been signed, the software product has been shipped, there
are no uncertainties surrounding software product acceptance, the fees are fixed
and determinable, and collection is considered probable. For customer license
agreements which have payments due within one year, the portion allocated to
software license fees will generally be recognized in the current period, while
the portion allocated to services is recognized as the services are performed.
When the Company enters into a license agreement with a customer requiring
significant customization of the software products, the Company recognizes
revenue related to the license agreement using contract accounting. The
aggregate amount of customer license agreements ("contracting activity") signed
for software license fees and bundled services increased from $114.6 million in
the quarter ended September 30, 1996 to $181.1 million for the same period in
1997, and from $271.1 million in the nine month period ended September 30, 1996
to $473.2 million for the same period in 1997. Contracting activity with new
customers comprised approximately 66% of the total customer license agreements
signed with 150 new customers compared to 65% and 130 new customers in the
quarter ending June 30, 1997. Average transaction size, computed by dividing the
number of new customers into contracting activity, increased to approximately
$1.2 million in the quarter ended September 30, 1997.
Revenues from licensing fees increased by 68% from $67.1 million in the
three month period ended September 30, 1996 to $113.0 million for the same
period in 1997. Year-to-date, licensing fees increased 75% from $167.7 million
in 1996 to $293.4 million in the same period in 1997. The increase in license
fee revenues was attributable to continued increased market acceptance of, and
breadth of, the Company's software product offerings and the increased capacity
created by continued growth in the Company's sales, marketing and customer
service organizations.
Revenues from services increased by 107% from $50.3 million in the three
month period ended September 30, 1996 to $104.1 million for the same period in
1997. Year-to-date, service revenues increased 94% from $134.7 million in 1996
to $261.7 million in the same period in 1997. Service revenues as a percentage
of total revenues were 43% and 48% for the quarters ended September 30, 1996 and
1997, respectively, and 45% and 47% for the nine months ended September 30, 1996
and 1997, respectively. The Company's customer license agreements provide for
initial maintenance, training, installation and support services for specified
periods or amounts. Therefore, increases in customer licensing agreements have
resulted in increases in revenues from these services. In addition, the increase
in services revenues was attributable to two other primary factors: increases in
the installed base of customers receiving ongoing maintenance, training and
other support services; and a significant increase in consulting revenues
generated by the Company's professional services staff. The Company has
aggressively invested in expansion of the worldwide professional services staff,
which grew substantially over the comparable period in 1996 as a result of
increased customer demand for the Company's direct assistance during enterprise
implementation projects.
Total revenues increased by 85% from $117.4 million in the three month
period ended September 30, 1996 to $217.1 million for the same period in 1997.
Year-to-date, total revenues increased 84% from $302.4 million in 1996 to $555.1
million in the same period in 1997. Total revenue grew 18% from the previous
quarter which was higher than the Company's forecast of 13% revenue growth.
License fees and services revenue grew faster than forecasted in all areas
(maintenance, training and consulting services) in response to general industry
demand for software products and related services in implementations. In
response to this demand, the Company continues to rapidly expand its service
delivery capacity, particularly in the professional services (consulting)
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area and in general, expects some lag between the addition of resources and the
production of revenue from those incremental resources which increases the
complexity of forecasting revenue levels.(1)
During the quarters ended September 30, 1996 and 1997, the Company's
international revenues were approximately 17% and 16% of total revenues,
respectively. Revenues from international operations increased 74% from $20.0
million in the three month period ended September 30, 1996 to $34.8 million in
the same quarter in 1997. While contracting activity continues to grow
sequentially, international revenues as a percentage of total revenues fluctuate
due to contract terms which determine revenue recognition. The multi-language
availability of Release 6 occurred toward the end of the second quarter,
however, it did not have any significant impact on international performance
during the current quarter. The Company expects international revenues to grow
substantially during 1997, however, it is unlikely that the percentage of
international revenues in comparison to total revenues will change significantly
during 1997(1). The Company continues to invest heavily in building
international infrastructure, developing global product functionality and
translated versions of financial and other products, and expects material gains
in the proportion of international revenues in 1998 and beyond(1). In the event
international expansion and/or product globalization are not successful, the
Company's operating results and/or growth prospects are likely to be materially
adversely affected.
COSTS AND EXPENSES
Cost of license fees consists principally of royalties, technology
access fees for certain third party software products and amortization of
capitalized software costs. Cost of license fees increased by 124% from $2.7
million in the three month period ended September 30, 1996 to $ 6.1 million for
the same period in 1997, representing 2 and 3% of total revenues for each
quarter, respectively, and 4 and 5% of license fee revenues in each quarter,
respectively. Cost of license fees in the nine month periods ended September 30,
1996 and 1997 were $8.3 million and $15.4 million, respectively, representing 3%
of total revenues in each period. The Company's software products are based on a
combination of internally developed technology and application products, as well
as bundled third party software products and technology. Cost of license fees as
a percentage of license fee revenues may fluctuate from period to period due
principally to the mix of sales of royalty-bearing software products in each
period and seasonal fluctuations in revenues contrasted with certain fixed
expenses such as the amortization of purchased and capitalized software.
Royalties associated with certain software products currently under development
by joint business arrangements and charges associated with software products and
technologies acquired from various third party vendors may cause the cost of
license fees as a percentage of license fee revenues to increase in future
periods.
Cost of services consists principally of account management field
support, training, consulting and product support costs. These costs increased
by 84% from $32.5 million in the three month period ended September 30, 1996 to
$59.8 million for the same period in 1997, representing 28 of total revenues in
each quarter and 65% and 57% of service revenues in those quarters,
respectively. Costs of services increased by 97% from $80.4 million in the nine
month period ended September 30, 1996 to $158.4 million for the same period in
1997, representing 27% and 29%, of total revenues and 60% and 61% of service
revenues in those periods, respectively. The increase in cost of services is due
to significant expansion of the Company's customer service resources across all
categories, including consulting, telephone support, training and account
management staff.
Sales and marketing expenses increased by 73% from $35.5 million in the
three month period ended September 30, 1996 to $61.5 million for the same period
in 1997, representing 30% and 28% of total revenues respectively. These expenses
increased by 67% from $93.7 million in the nine month period ended September 30,
1996 to $156.0 million for the same period in 1997, representing 31% and 28% of
total revenues, respectively. The increase in sales and marketing expenses is
attributable to the Company's continued expansion of its direct sales force,
increased commission expense associated with higher revenue, increased
depreciation from related equipment and facility expenditures, continued
investment in building an international direct sales force and increased
marketing expenses for the Company's expanded software product line. The Company
continues the process of increasing its direct sales and marketing expenditures
to address certain international markets, establish an industry focused
enterprise sales force structure and fund both cross industry and industry
specific marketing and sales activities. Consequently, such expenses may
increase as a percentage of total revenues in future periods.(1)
Software product development expenses increased by 84% from $19.0
million in the three month period ended September 30, 1996 to $34.9 million for
the same period in 1997 representing 16% of total revenues, in each quarter.
These expenses increased by 81% from $49.6 million in the nine month period
ended September 30, 1996 to $89.7 million for the same period in 1997,
- --------
(1) Forward looking statement
10
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representing 16% of total revenues in each period. Software product development
expenditure increases are directly attributable to increases in the Company's
staff of software engineers and consultants, and the associated infrastructure
costs required to support product development initiatives in the following
areas: i) expansion and enhancement of the Company's core product offerings in
the areas of HRMS, Financial Management Systems, Distribution/Materials
Management Systems and PeopleSoft's Enterprise Resource Optimization software;
ii) the enhancement of the Company's platform development, certification,
product testing and overall release management capabilities; iii) the continued
enhancement of the Company's client/server architecture including its software
development tools and the integration of these tools with various third party
purchased or licensed technologies; iv) the localization and translation of
certain versions of the Company's software products for specific foreign
markets; and v) the development of certain vertical market software products and
versions of its core software products suitable to the unique needs of customers
within certain industries. The Company anticipates software product development
expenditures will significantly increase in future periods due to continued
incremental investment in all of the above areas, and overall development
expenditures may increase as a percentage of revenues(1). In particular, the
Company's development expenditure increases during 1997 are being driven by i)
the acquisition of PeopleSoft Manufacturing, Inc. and PeopleMan L.P.
(collectively referred to as PMI) and the ongoing associated expansion of the
Company's manufacturing application development activities; ii) the investment
in a new line of human resource management system products for the public sector
(PeopleSoft HRMS for the Public Sector) which was released in April, 1997; iii)
the release in the second quarter of 1997 of Release 6 Financials for Public
Sector; iv) the release in the second quarter of 1997 of a kanji based version
of its HRMS and Financial software products for the Japanese marketplace; v) the
release of multi-language translations of a portion of its Release 6 software
products in the second quarter of 1997; vi) the beta release of Student
Administration products for the Higher Education marketplace in April 1997, and
the associated merger in July of 1997 of Campus Solutions, the company primarily
responsible for building the Student Administration Product family; vii) the
release of version 7.0 in September of 1997; and viii) the commercial release of
two software products: PeopleSoft Configurator and PeopleSoft Engineering. The
Company intends to continue to invest significant resources in upcoming
releases(1).
General and administrative expenses increased by 57% from $7.0 million
in the three month period ended September 30, 1996 to $11.0 million for the same
period in 1997, representing 6% and 5% of total revenues in each quarter,
respectively. These expenses increased by 71% from $17.9 million in the nine
month period ended September 30, 1996 to $30.5 million for the same period in
1997, representing 6% and 5% of total revenues in each period, respectively. The
increase in general and administrative expenses resulted primarily from
increases in staffing and information systems infrastructure to support the
Company's growth and increases in expenses associated with the operation of
foreign subsidiaries.
Operating margins for the three month period ended September 30, 1997
increased to 20.2% compared to 17.7% for the same period last year and 18.5% for
the second quarter of 1997, respectively. Operating margins for the nine month
period ended September 30, 1997 increased to 18.9% compared to 17.4% for the
same period last year. The 1997 third quarter operating margin percentage was
higher than implied in the Company's business outlook for the third quarter
primarily due to higher than expected revenues as discussed above.
Other income, consisting primarily of interest, increased from
$1.3 million in the three month period ended September 30, 1996 to $2.5 million
for the same period in 1997, and increased from $4.3 million in the nine month
period ended September 30, 1996 to $7.0 million for the same period in 1997
primarily due to a higher balance of cash and investable assets, and a higher
concentration of such balances in higher interest bearing instruments.
The Company's income tax provision increased from $8.8 million in the
three month period ended September 30, 1996 to $17.6 million for the same period
in 1997, and increased from $22.7 million in the nine month period ended
September 30, 1996 to $43.2 million for the same period in 1997. The provision
for income taxes was 38.0% of income before taxes for the quarter and 38.6% for
the nine month period ended September 30, 1997 which represents a 1.4 percentage
point decline from the 1996 annual effective income tax rate. The reduction in
the estimated effective tax rate from 1996 to 1997 is primarily attributable to
the following two items: i) recent favorable changes in the State of
California's research and development tax credit rules, and ii) a shift in the
mix of worldwide operating results based on the Company's current projection of
operating income by country. The provision for income taxes in the quarter ended
September 30, 1997 reflects an adjustment to the 1997 annual effective tax rate
as a result of the changes in the federal research and development tax credit
rules. Accordingly, the 1997 estimated annual effective tax rate is 38.6%. The
estimated annual effective tax rate is relatively sensitive to the results of
operations in various foreign legal entities, and because such
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(1) Forward looking statement
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projections may change in future periods, the actual effective tax rate could
differ from this estimate. As permitted by SFAS No. 109, "Accounting for Income
Taxes", the Company has recorded $33.6 million in net deferred tax assets at
September 30, 1997.
EARNINGS PER SHARE
Earnings per share increased from $ .11 in the three month period ended
September 30, 1996 to $ .23 for the same period in 1997, and increased from $.29
in the nine month period ended September 30, 1996 to $ .55 for the same period
in 1997. Earnings per share increased as a result of the 118% increase in net
income from $13.2 million for the three month period ended September 30, 1996 to
$28.7 million for the same period of 1997, partially offset by a 5% increase in
weighted average outstanding shares from 120.7 million shares as of September
30, 1996 to 126.9 million shares as of the same date in 1997. The increase in
weighted average shares outstanding was due to an increase in common stock
outstanding, primarily from the exercise of employee stock options, and common
stock equivalents outstanding, primarily from additional stock option grants and
an increase in the market price of the company's stock.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $147.4 million
during the nine month period ended September 30, 1997, compared to $95.5 million
in the same period in 1996. Operating cash flows increased primarily due to
increases in income before non-cash items, non-cash expenses, deferred revenue,
accrued compensation and related expenses and income taxes payable, which were
partially offset by increases in accounts receivable and other assets. From
December 31, 1996 to September 30, 1997, net accounts receivable increased from
$163.7 million to $258.2 million and deferred revenues increased from $183.3
million to $283.8 million. The increase in net accounts receivable resulted from
the growth in customer licensing activity offset by cash collections. Deferred
revenue has increased as a result of the growth in customer licensing activity
and the associated deferrals of revenues related to services to be provided to
new licensees.
The Company calculates accounts receivable days sales outstanding
("DSO") as the ratio of quarter-end accounts receivable to the sum of quarterly
revenues plus the net change in deferred revenues, multiplied by 90. The Company
believes this calculation is appropriate because contracting activity may impact
accounts receivable regardless of whether revenue has been recognized or
deferred. Under this method, DSO was 89 days as of September 30, 1996, 83 days
as of December 31, 1996, and 86 days as of September 30, 1997. Since billing
terms of the Company's agreements typically are spread out over a sequence of
events (including contract execution) or dates that generally span four to nine
months, and contracting activity is concentrated toward the end of each quarter,
the Company anticipates that its DSO will continue to be substantial in future
periods.
During the first nine months of 1996 and 1997, the Company's principal
use of cash for investing activities was for purchases of short term investments
and computer and networking equipment to accommodate employee and facility
expansions and to support the Company's growing training capacity requirements.
As of September 30, 1997, the Company had $191.4 million in working
capital, including $222.4 million in cash and cash equivalents, and $98.0
million in short term investments, consisting primarily of high quality
municipal bonds, federal government and government agency bonds, and
tax-advantaged money market instruments. The Company believes that existing cash
and short-term investment balances, proceeds from sale of stock under the
employee purchase plan and stock option exercises, potential proceeds from
issuance of stock for warrants, and potential cash flow from operations will be
sufficient to meet its operating cash requirements, at least through September
1998(1).
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(1) Forward looking statement
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BUSINESS OUTLOOK
The following forward looking statements are based on current expectations which
are subject to material change due to a variety of factors including but not
limited to, those which are listed below and in the section titled "Factors That
May Affect Future Results". These forward-looking statements and other
forward-looking statements made elsewhere in this document are made in reliance
upon safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include, but are not limited to, those items
identified with a footnote (1) symbol. The Company undertakes no obligation
to update the information contained herein.
- Based on its current expectations of contracting activity, and an
analysis of the Company's service delivery capacity and the expected
customer utilization of such services, the Company expects total
revenues for the fourth quarter of 1997 to increase approximately 15%
over total revenues recorded in the third quarter of 1997(1). For the
1998 calendar year, the Company expects total revenues to increase
between 45% and 55% over the total revenues expected to be recorded in
the 1997 calendar year(1). As with any forecast, actual results could
vary within a few percentage points on either side of these estimates
even if there are no material changes to the underlying assumptions, and
longer term forecasts can be expected to have relatively higher
variability. The key assumptions on which this forecast is based
include, but are not limited to, the following: i) total actual
available market opportunities must be reasonably consistent with those
forecasted by certain major information technology market research
firms; ii) the preservation of the Company's ability to generate a
sufficient number of qualified leads through its ongoing marketing
programs; iii) an increase in the Company's direct sales capacity
through the successful recruitment, hiring, training and retention of
additional sales and sales support personnel; iv) no significant adverse
changes in the competitive landscape; and v) the continued demand for
the Company's applications as an alternative to modification of legacy
systems where prospects have issues relating to data processing in the
year 2000. In addition, the achievement of expected contracting activity
and total revenues is highly dependent upon the Company's ability to
successfully manage the potential risks detailed below in the section
titled "Factors That May Affect Future Results" including, but not
limited to, fluctuations in quarterly operating results; changes in
customer demand; the timing and complexity of large transactions
including the bundling of significant amounts of professional services;
ability to recognize contracting activity in the current quarter under
revenue recognition accounting rules; success of international
operations; reliance on third parties for sales, marketing and
implementation assistance; timing and acceptance of software products
and product development; and the ability to execute hiring and facility
expansion plans.
- The Company's operating model is based on a rolling four quarter target
operating margin of between 18% and 20%. The Company expects 1997's full
year results to be within this range(1). The Company is in the process
of budgeting its 1998 operations, and plans to target the midpoint of
this operating profit range(1). Due to the significant operating
leverage which is characteristic of the software industry, any deviation
in the expected revenues could significantly impact the Company's
ability to meet the target operating margins. Achievement of forecasted
operating margins is highly dependent upon the Company's ability to
successfully manage the potential risks detailed below in the section
titled "Factors That May Affect Future Results" including, but not
limited to, achievement of revenue forecasts as discussed above;
continued introduction and marketing of new and enhanced versions of
software products; successful penetration of international markets;
continued acceptance of the Company's software products, particularly
its proprietary software development tools; successful porting and
acceptance of its software products on a variety of platforms; continued
acceptance of its application security architecture and intellectual
property, preservation of its proprietary rights and product liability
protections; and continued success in hiring, training and retaining key
personnel and completing expansion of facilities.
- Based on projected cash and investment balances, constant interest rates
and no unusual items of other income or expense, the Company expects
other income on a quarterly basis to remain flat to slightly higher in
absolute dollars compared to the third quarter of 1997(1). The
achievement of forecasted other income targets is dependent on: i)
stable financial markets which preclude a significant overall decline in
investment yields, or a significant fluctuation in foreign currency
exchange rates, and ii) avoidance of default on any individual
significant investment. Should the Company decide to utilize a
significant portion of its current cash and investments to acquire
complementary businesses, products, technologies or to acquire
additional facilities through purchase of land and/or buildings,
interest income may decline significantly causing other income to
deviate from forecasted amounts.
- Based on current tax law and the Company's present forecast of operating
results by country, the effective tax rate in 1997 is expected to be
38.6%(1). The estimated annual effective tax rate is relatively
sensitive to the results of operations in various foreign legal
entities, and because such projections may change in future periods, the
actual effective tax rate could differ from this estimate.
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(1) Forward looking statement
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Please read the section below titled "Factors The May Affect Future
Results" for additional information and discussion of conditions which the
Company believes could cause actual results to differ materially from those
contemplated by forward looking statements.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company has identified certain forward-looking statements in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations (which includes the Business Outlook Section) with a bold footnote(1)
symbol. The Company may also make oral forward-looking statements from time to
time. Actual results may differ materially from those projected in any such
forward-looking statements due to a number of factors, including those set forth
below and elsewhere in this Form 10-Q.
The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The following section lists some, but
not all, of these risks and uncertainties which may have a material adverse
effect on the Company's business, financial condition and/or results of
operations. This section should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and Notes thereto included in Part I
- -- Item 1 of this Quarterly Report and the audited Consolidated Financial
Statements and Notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1996, contained in the Company's 1996 Annual Report to Stockholders (Form 10-K).
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's revenues and operating results can vary substantially from
quarter to quarter. License revenues in any quarter are substantially dependent
on the execution of license agreements ("contracting activity") governing the
use of the Company's software products booked and shipped in that quarter.
Contracting activity is difficult to forecast for a variety of reasons
including: (i) a significant portion of the Company's license agreements are
completed within the last few weeks of each quarter; (ii) the duration of the
Company's sales cycle is relatively long and increasingly variable because the
Company has broadened its marketing emphasis to encompass software product
solutions for the customer's overall enterprise, thereby increasing the
financial value of individual transactions and the complexity of the customer
selection, negotiation and approval process; (iii) the size of license
transactions can vary significantly; (iv) system replacement projects and new
system evaluations may be postponed or canceled at any time due to changes in a
customer's project, company management, budgetary constraints or strategic
priorities; (v) customer evaluations and procurement processes vary
significantly from company to company, and a customer's internal approval and
expenditure authorization process can be arduous, even subsequent to actual
vendor selection; (vi) the number, timing and significance of software product
enhancements and new software product announcements by the Company and its
competitors; (vii) as the Year 2000 approaches, many potential customers are
evaluating their legacy systems and must decide whether to repair or replace
existing applications which have Year 2000 operability issues. While the Company
believes that such evaluations are favorably impacting demand for its
applications, such demand is subject to change as the Year 2000 draws closer
since lead times required to complete systems implementations preclude system
replacement as a timely solution to the Year 2000 issue. Given the lack of
precedent for an issue of this magnitude, the Company's ability to accurately
forecast the impact of the issue on quarter to quarter revenue achievement is
limited; and (viii) changes in economic, political and market conditions can
adversely impact business opportunities without any notice. In addition, certain
license agreements executed during a quarter may not meet the Company's revenue
recognition criteria. Consequently, a situation could occur in which the Company
meets or exceeds its forecast of aggregate contracting activity, but is not able
to meet its forecast for license revenues.
In addition to factors impacting contracting activity, license revenues
are difficult to forecast because: (i) the timing of new software product
availability to fulfill delivery obligations under both new and existing license
agreements is difficult to predict because of the increasing complexity of the
Company's technology, software product solutions and underlying development and
testing processes; (ii) changes in the Company's sales incentive plans have had
and may continue to have an unpredictable impact on seasonal business patterns;
(iii) enterprise transactions often involve both software products that are then
currently deliverable, as well as software products that are still under
development; to the extent the Company enters into a license agreement for the
provision of both software product categories, the license agreement and
supporting schedules to the license agreement must contain very precise
contractual provisions and terminology consistent with generally accepted
accounting principles to permit any revenue recognition under the license
agreement; (iv) enterprise transactions may grant rights to process data across
complex, widely distributed computing environments. Due to a variety of factors
including, but not limited to, differences in relational database product
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(1) Forward looking statement
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performance across wide area networks, differences in speed of various
communication links and differences in hardware platform performance, there is a
limited ability to accurately predict product performance in some of these
environments. To the extent the Company enters into a license agreement with an
enterprise customer incorporating such non-standard acceptance criteria which
includes various on-line and batch performance measures within such
environments, revenue recognition could be postponed pending verification of the
performance capabilities within the operating environment; and (v) all of the
above factors, as well as other specific requirements under recently published
proposed generally accepted accounting standards for software revenue
recognition such as increased use of contract accounting when certain types of
professional services and/or payment terms are included in license transactions
create circumstances under which the Company must have very precise contractual
language in order to recognize revenue upon initial product delivery. Although
the Company has a standard license agreement which meets the demanding criteria
under generally accepted accounting principles, the Company must often negotiate
and revise certain terms and conditions in large enterprise transactions.
Negotiation of mutually acceptable language can extend the sales cycle, and in
certain situations, the Company does not always obtain terms and conditions
which permit recognition of revenue at the time of delivery or even under the
percentage of completion method under contract accounting rules.
Services revenues have varied from quarter to quarter due to changes in
levels of consulting activity and seasonality in training revenues which tend to
lag license revenues by approximately one quarter. In order to continue the
growth of service revenues, particularly those related to professional services,
the Company must continue to recruit, hire and train growing numbers of
consultants.
OPERATING LEVERAGE
Consistent with many companies in the software industry, the Company's
business model is characterized by a very high degree of operating leverage.
Employee and facility related expenditures comprise a significant portion of the
Company's operating costs and expenses, and are therefore, relatively fixed at
least over the short term. In addition, the Company's expense levels and hiring
plans are based, in significant part, on the Company's expectations as to near
term future revenue levels. If revenue levels fall below expectations, net
income is likely to be disproportionately adversely effected. There can be no
assurance that the Company will be able to increase or even maintain its current
level of profitability on a quarterly or annual basis in the future. Due to the
foregoing, it is likely that in one or more future quarters the Company's
operating results will be below the expectations of public securities market
analysts. In such event, the price of the Company's common stock would likely be
materially adversely affected.
UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS
Although the Company's 1997 operating budget is based on projections of
a material increase in total revenues over the corresponding actual results for
1996(1), the Company does not believe that the percentage increases in revenues
achieved in prior periods should be anticipated in future periods. The operating
results of many software companies reflect seasonal trends, and the Company has
been, and expects to continue to be, affected by such trends in the future.
Seasonal patterns of revenue achievement can be caused by a variety of factors,
including sales incentives, customer demand based on available capital budgets
and the release of new technologies.
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(1) Forward looking statement
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FUTURE OPERATING RESULTS UNCERTAIN
Segments of the software industry have experienced significant economic
downturns characterized by decreased product demand, price erosion,
technological shifts, work slowdowns and layoffs. The Company's operations may,
in the future, experience substantial fluctuations from period to period as a
consequence of such industry patterns, general economic conditions affecting the
timing of orders from customers and other factors affecting capital spending.
There can be no assurance that such factors will not have a materially adverse
effect on the Company's business, operating results or financial condition. The
Company's continued success is dependent on its continued ability to introduce,
develop and market new and enhanced versions of its software products, although
there can be no assurance that such ability can be maintained.
INTERNATIONAL OPERATIONS
The Company has utilized, and will continue to utilize substantial
resources and funding to build its international service and support
infrastructure. Operating costs in many countries, including some of those in
which the Company operates, are often higher than in the United States. In order
to increase international sales in 1997 and subsequent periods, the Company must
continue to globalize its software product lines, expand existing, as well as
establish additional, foreign operations, hire additional personnel, identify
suitable locations for sales, marketing, customer service and development, and
recruit international distributors and resellers in selected territories. In the
event international expansion and/or product globalization are not successful,
it is likely to have a negative impact on the Company's operating results.
The Company's sales through its foreign operations are generally denominated in
each respective subsidiary's functional currency. Unexpected changes in the
exchange rates for these foreign currencies could result in significant
fluctuations in the foreign currency transaction and translation gains and
losses in future periods. In the future, the Company expects to have an
increased amount of non-U.S. dollar denominated license agreements and intends
to implement hedging programs designed to mitigate the potential adverse impact
of exchange rate fluctuations.
COMPETITION
The market for business application software is intensely competitive.
The Company faces competition from a variety of software vendors including
enterprise application software vendors, manufacturing application software
vendors, enterprise resource optimization application software vendors,
financial management systems and HRMS (human resource management systems)
application software vendors and software tools vendors. Although the Company
believes its success has been due in part to its early emphasis on the
client/server architecture, virtually all of the Company's competitors now offer
software products based on a client/server architecture. Consequently,
competitive differentiators now include more subtle architectural and
technological factors, such as web enablement, enterprise product breadth and
individual product features, service reputation, product flexibility, ease of
implementation, international product version availability and support, and
price.
In the enterprise application software market, PeopleSoft faces
significant competition from SAP AG, Oracle Corporation and Baan Company N. V.
and to a lesser degree, Dun & Bradstreet Software (now operating as two separate
divisions of Geac Computer Systems, Inc.), Computer Associates International,
Inc. and other companies such as System Software Associates who previously
focused primarily on the AS/400 marketplace. In this market, the chief
competitive factors include the breadth and completeness of the enterprise
solution offered by each vendor, the extent of product integration across the
enterprise solution and the availability of localized software products and
technical support in key markets outside the United States. Primarily due to
their significant worldwide presence and longer operating and product
development history, both SAP and Oracle have certain competitive advantages
over PeopleSoft in each of these areas. In addition, both SAP and Oracle have
substantially greater financial, technical and marketing resources, and a larger
installed base than PeopleSoft. Furthermore, Oracle's RDBMS (relational database
management system) is a supported platform underlying a significant share of
PeopleSoft's installed applications.
In the manufacturing software application markets, in which PeopleSoft
recently began competing, PeopleSoft faces competition from several of its
existing competitors including those listed immediately above and others such as
QAD, Ross Systems and J.D. Edwards and a large number of niche competitors
already in the manufacturing market.
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In the emerging enterprise resource optimization software solutions
market, in which the Company now competes since its acquisition of Red Pepper
Software during the fourth quarter of 1996, PeopleSoft faces several current and
potential competitors including: (i) companies such as i2 Technologies,
Manugistics and Numetrix Software which have developed or are attempting to
develop advanced planning and scheduling software products which complement or
compete with MRP (material requirements planning) solutions; (ii) other
companies that provide specialized planning and scheduling software for niche
markets, including Chesapeake Systems, Waterloo Manufacturing Software, MAPICS,
Inc. (formerly Marcam Corporation), Marcam Solutions, Inc. and Cap Logistics;
(iii) other business application software vendors that may broaden their product
offerings by internally developing, or by acquiring (such as Baan's recent
acquisitions of Berclain Group, Inc. and Antalys, Inc. or partnering with
independent developers of advanced planning and scheduling software; (iv)
internal development efforts by corporate information technology departments;
and (v) companies offering standardized or customized products on mainframe
and/or mid-range computer systems.
PeopleSoft also faces competition from providers of HRMS software
products including Cyborg, Lawson, Integral Systems, Inc., InPower and Ceridian,
and from providers of financial management systems software products including
Hyperion, Computron Software, Inc., Lawson Associates and other smaller
companies. In addition, ADP, Inc. and Shared Medical Systems, Inc. have the
right to sublicense selected PeopleSoft products in competition with
PeopleSoft's marketing efforts in selected markets.
In addition, as the year 2000 approaches, enterprises may consider
outsourcing options including data center outsourcing and service bureaus as
viable alternatives to purchasing the Company's products which may result in
increased competition from outsource services including Computer Science
Corporation (CSC), Electronic Data Systems Corporation (EDS), IBM, ADP,
Ceridian, and other smaller companies.
Intense competition could potentially lead to increased price
competition in the market, forcing the Company to reduce prices which may result
in reduced gross margins and loss of market share by the Company which
therefore, could materially adversely affect the Company's business, operating
results and financial condition. Therefore, there can be no assurance that the
Company will continue to compete successfully with its existing competitors or
will be able to compete successfully with new competitors.
RELIANCE ON PROPRIETARY SOFTWARE DEVELOPMENT TOOLS
The Company's software products include a suite of proprietary software
development tools known as "PeopleTools", which are fundamental to the effective
use of the Company's software products. While no industry standard exists for
software development tools, several companies are focused specifically on
providing software development tools and are attempting to establish their
software development tools as accepted industry standards. In the event that a
software product other than the Company's PeopleTools software product becomes
the clearly established and widely accepted industry standard, the Company may
need to abandon or modify PeopleTools in favor of such an established standard,
may be forced to redesign its software products to operate with such third
party's software development tools, or may be faced with the potential sales
obstacle of marketing a proprietary software product against other vendors'
software products incorporating a standardized software development toolset.
Accordingly, in any of these cases, the Company's results of operations could be
materially adversely affected.
RELIANCE ON THIRD PARTIES FOR SALES, MARKETING AND SOFTWARE PRODUCT
IMPLEMENTATIONS
A key aspect of the sales and marketing strategy for the Company is to
build and maintain strong working relationships with businesses the Company
believes play an important role in the successful marketing of its software
products. The Company's customers and potential customers often rely on third
party system integrators to develop, deploy and manage client/server
applications. These include: (i) RDBMS software vendors; (ii) hardware vendors
which offer both hardware platforms and, in the case of IBM, proprietary RDBMS
products on which the Company's software products run; (iii) technology
consulting firms and systems integrators, some of which are active in the
selection and implementation of large information systems for the
information-intensive organizations that comprise the Company's principal
customer base; and (iv) benefits consulting firms that are active in the
implementation of HRMS. The Company believes that its marketing and sales
efforts are enhanced by the worldwide presence of these companies. However,
there can be no assurance that these companies, most of which have significantly
greater financial and marketing resources than PeopleSoft, will not start, or in
some cases increase, the marketing of business application software in
competition with PeopleSoft, or will not otherwise discontinue their
relationships with or in support of PeopleSoft. If the Company or its partners
are unable to recruit and adequately train a sufficient number of consulting
personnel to support the implementation of the Company's software products,
demand for these software products could subsequently be materially adversely
affected. In addition, PeopleSoft's software application architecture, including
PeopleTools, may facilitate reduced implementation efforts for customers
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compared to the competitive alternatives. Consequently, PeopleSoft's software
products may be a less desirable recommendation alternative for integrators who
provide both selection advice and generate consulting fees from customers by
providing implementation services. Due to the foregoing factors, it is
reasonably possible that in a future quarter or quarters the Company's operating
results could fall short of the published expectations of certain public market
financial analysts.
COMPLEXITY OF SOFTWARE PRODUCTS AND PRODUCT DEVELOPMENT
PeopleSoft's software products can be licensed for use with the following
RDBMS's and run on the following operating systems: IBM's DB2 ( MVS/ESA or
OS/390 using connectivity products from Centura or IBM and separately, AIX,
OS/390 version 5 and OS/400), Informix INFORMIX-OnLine Dynamic Server (AIX,
Dynix, Solaris, MP RAS, Digital Unix, Unisys Unix, DG/UX, DC/Osx, IRIX, SCO Open
Server, Reliant Unix, NT, and HP-UX), Microsoft SQL Server NT version 6.5,
Oracle (NT and over 10 versions of Unix), and Sybase's System 11 (Digital Unix,
HP-UX, AIX and Solaris). In addition, the Company has introduced client support
for Apple's Macintosh family of computers using Sun Microsystem's Java platform
running on the Macintosh client in PeopleTools. No assurance can be given
concerning the successful development of PeopleSoft software products on
additional platforms, the specific timing of the releases of any future software
products, the performance characteristics of PeopleSoft applications on
additional platforms or their acceptance in the marketplace. In addition, there
may be future or existing RDBMS platforms which achieve popularity within the
business application marketplace and which PeopleSoft may desire to offer its
applications thereon. Such future or existing RDBMS products may or may not be
architecturally compatible with PeopleSoft's software product design. No
assurance can be given concerning the successful porting to new platforms, the
specific timing of completion of any such ports or their acceptance in the
marketplace.
Beginning with Release 6, the Company integrated certain features of
BEA's Tuxedo product into its applications. Over the next several releases,
additional Tuxedo features will be integrated to allow applications to run on a
distributed basis using a multi-tiered client/server architecture(1). Cognos'
Powerplay product will be bundled to incorporate desktop on-line analytical
processing ("OLAP") capabilities(1). Such enhancements may be critical to the
competitiveness of the Company's products in the future. Integration of these
and other products is complex and no assurance can be made that these efforts
will be successful or result in significant product enhancements.
Software programs as complex as those offered by the Company are likely
to contain a number of undetected errors or "bugs" when they are first
introduced or as new releases are thereafter released. Despite testing by the
Company and by third-parties, errors or system performance issues may arise with
the possible result of reduced acceptance of the Company's software products in
the marketplace. Due to the increasing number of possible combinations of vendor
hardware platforms, operating systems and updated versions, PeopleSoft
application software products and updated versions, and RDBMS platforms and
updated versions, the effort and expense of developing, testing and maintaining
these software product lines in an increasing number of combinations will
increase, and the ability to develop consistent product performance
characteristics across all of these combinations could place a significant
strain on the Company's development resources and product release schedules.
RELIANCE ON CLIENT INTERFACES
At the present time, the Company supports client (workstation) platforms
predominantly utilizing Microsoft's Windows family of software products,
including Windows 3.1 (PeopleSoft releases prior to Release 6 only), Windows NT
and Windows 95. If Microsoft were to fundamentally change the architecture of
its software product such that users of PeopleSoft's software applications
experienced significant performance degradation or were rendered incompatible
with future versions of Microsoft's Windows Operating System, the Company's
results of operations could be materially adversely effected. If a new user
interface were to gain broad acceptance in the marketplace, there can be no
assurance that PeopleSoft's architecture would be compatible with such an
interface.
The use of a Web browser (running on either a PC or network computer) to
access client/server systems is emerging as an alternative client to the
traditional desktop access through Microsoft Windows based personal computers.
The Company has enabled access to its applications through this new emerging
client utilizing a Web Client built on Sun Microsystems' Java environment and
BEA Systems Inc.'s BEA Jolt middleware. Such client access via the Internet will
be subject to numerous risks inherent in utilizing the Internet including:
security, availability and reliability. No assurance can be given concerning the
Company's successful support for new client platforms, the specific timing of
their availability or their acceptance in the marketplace.
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(1) Forward looking statement
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RELIANCE ON JOINT BUSINESS ARRANGEMENTS
The Company has, and may in the future, enter into various development
or joint business arrangements for the purpose of developing new software
products or extensions to existing software products. Under these development
arrangements, the Company is generally the exclusive remarketer of the developed
software products and pays a royalty to the funding entities based on license
fees received from end user licenses of these software products. Under joint
business arrangements, the Company may distribute or jointly sell with its
business partner an integrated software product offering. While the intent of
such arrangements is to develop business applications which are integrated with
the Company's software products, there can be no assurance that such software
products will in fact be integrated or that an integrated enterprise solution
will be accepted by the market. In addition, should such arrangements require
additional investments from third parties or business partners to complete
development or enhance the software product, there can be no assurance that
investments will be available on terms acceptable to the business partner or the
existing or other potential third party funding source(s). Should PeopleSoft
acquire title to the software products or technology from the third party
entity, such an acquisition might be accounted for using the purchase method
which is likely to result in either or both of the following accounting
treatments: (i) a charge to earnings for in-process research and development
which would be recorded in the Statement of Income in the period such
acquisition was completed; or (ii) the creation of significant intangible assets
by virtue of an allocation of a substantial portion of the purchase price to the
acquired technology or other intangible assets. Such intangible assets would be
amortized in future periods as a cost of operations. Should either of these
scenarios occur, the results of operations of one or more future periods could
be materially adversely impacted.
APPLICATION SECURITY ARCHITECTURE
The Company's application software products incorporate extensive
security features designed to protect certain sensitive data managed by these
applications from unauthorized retrieval or modification. The Company has
developed a security architecture utilizing the capabilities of its own
applications, the client operating system software, some of the security
features contained in the RDBMS platforms on which the applications run, as well
as certain third party security products. To date, the Company is not aware of
any violations of its application security architecture within its installed
base. Although these security features are subject to constant review and
enhancement, no assurances can be given concerning the successful implementation
of these security features and their effectiveness within a particular
customer's operating environment. Should a breach of security or a suspected
breach of security occur, the accompanying publicity or any subsequent claims
against the Company could have an adverse impact on the demand for the Company's
software products and/or cause a decline in the market price of the Company's
stock and/or adversely impact the Company's financial results due to lost or
delayed closing of software licensing opportunities.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards certain features of its internal operations,
software and documentation as proprietary, and relies on a combination of
contract, patent, copyright, trademark and trade secret laws and other measures
to protect its proprietary information. The Company received its first patent in
June 1995 and its second patent in August 1995. In July 1995, the Company
received title to a third patent as part of a teaming and development agreement.
Also, the Company has four additional patent applications pending. There can be
no assurance that any issued patents will result from such applications or that,
if issued, such patents will provide any meaningful competitive advantage.
Existing copyright laws afford only limited protection. The Company believes
that, because of the rapid pace of technological change in the computer software
industry, trade secret and copyright protection are less significant than
factors such as the knowledge, ability and experience of the Company's
employees, frequent product enhancements and the timeliness and quality of
support services. There can be no assurance that these protections will be
adequate or that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Many customers of PeopleSoft are beneficiaries of a source code
escrow arrangement to enable the customer to acquire a future limited right to
use the Company's source code solely for their internal provision of maintenance
services. This possible access to the Company's source code may increase the
likelihood of misappropriation or other misuse of the Company's intellectual
property. In addition, the laws of certain countries in which the Company's
software products are or may be licensed do not protect the Company's software
products and intellectual property rights to the same extent as the laws of the
United States.
19
<PAGE> 20
The Company does not believe that its software products, third party
software products the Company offers under sublicense agreements, Company
trademarks or other Company proprietary rights infringe the property rights of
any third parties. However, there can be no assurance that third parties will
not assert infringement claims against the Company in the future with respect to
current or future software products or that any such assertion may not require
the Company to enter into royalty arrangements or result in costly litigation.
KEY PERSONNEL
PeopleSoft believes that its continued success will depend in large part
upon its ability to attract, train and retain highly-skilled technical,
managerial and marketing personnel. The Company continues to hire a significant
number of additional sales, services and technical personnel. Competition for
the hiring of such personnel in the software industry is intense, and the
Company from time to time experiences difficulty in locating candidates with
appropriate qualifications or within various desired geographic locations.
Growth in contracting activity could be impacted by the Company's ability to
attract, train, retain and manage productive sales and sales support personnel.
The loss of services of one or more of the Company's key employees could
have a materially adverse effect on the Company's business, operating results
and financial condition. The Company has historically experienced a very low
attrition rate amongst all of its employees, especially those in critical
positions. The Company has several retention programs in place to retain such
key personnel including granting of stock with annual vesting periods over five
years. A number of key employees have vested stock options which have a
relatively low price when compared to the Company's current stock price. These
potential gains provide these employees the economic freedom to explore personal
objectives both within and outside the Company which may result in the loss of
one or more key employees during the coming years.
It is widely held that the technology industry is at or beyond a
condition of full employment. There can be no assurance that the Company will be
successful in attracting, training and retaining the personnel it requires to
develop, market, sell and support new or existing software or to continue to
grow.
YEAR 2000 COMPLIANCE
The Company's internal business information systems are primarily
comprised of the same commercial application software products generally offered
for license by the Company to end user customers. These applications have been
tested for Year 2000 compliance and are certified by the Information Technology
Association of America (ITAA) as Year 2000 compliant, therefore the Company does
not expect any Year 2000 compliance issues to arise related to its primary
internal business information systems. However, the Company utilizes other third
party vendor network equipment, telecommunication products, and other third
party software products which may or may not be Year 2000 compliant. Although
the Company is currently taking steps to address the impact, if any, of the Year
2000 issue surrounding such third party products, failure of any critical
technology components to operate properly in the Year 2000 may have an adverse
impact on business operations or require the Company to incur unanticipated
expenses to remedy any problems.
PRODUCT LIABILITY
The Company's license agreements with its customers contain provisions
designed to limit its exposure to potential product liability claims. It is
possible, however, that the limitation of liability provisions contained in such
license agreements may not be valid as a result of federal, state and local laws
or ordinances or unfavorable judicial decisions. Although the Company has not
experienced any product liability claims to date, the license and support of its
software for use in mission critical applications creates the risk of a claim
being pursued against the Company. Damage or injunctive relief resulting under
such a successful claim could cause a materially adverse impact on the Company's
business, operating results and financial condition. In addition, as PeopleSoft
begins to compete in the manufacturing software application market, the mission
critical nature of such software products may increase PeopleSoft's exposure to
product liability claims against the Company.
GROWTH IN OPERATIONS
The Company has experienced an extended period of significant revenue
growth, growth in the Company's customer base, expansion of its software product
lines and supported platforms both through internal development and mergers and
acquisitions, a significant increase in the number of its employees, and
expansion in the geographic scope of its operations. This growth has resulted in
new and increased responsibilities for management personnel, and has placed, and
is expected to continue to place a significant strain upon the Company's
management, operating, and financial controls and resources. To accommodate
recent growth, compete effectively, and manage potential future growth, the
Company must continue to implement and improve its operational and financial
systems, procedures and controls. In addition, the Company must continue to
expand, train, retain and manage its employee base. There can be no assurance
that the Company will be able to manage this expansion effectively, or that the
Company's personnel, procedures, systems and controls will be adequate to
support the Company's future operations.
20
<PAGE> 21
REORGANIZATION OF THE COMPANY'S SALES FORCE
Effective April 1, 1997, the Company reorganized its North American
sales operations around industry based territories and major account assignments
from a geographic based business unit organization structure. As part of this
reorganization, a substantial number of accounts, prospects and opportunities
previously assigned to one sales representative were reassigned to another sales
representative. This reassignment has caused delays in account assignments and
the associated management of the sales cycle, which may have resulted in lost
sales opportunities or otherwise lengthened the sales cycle. In addition, each
of the industry territories will require validation from one or more key
customer reference accounts. Such accounts are a critical factor for sales
success since sales prospects frequently require validation prior to entering
into a license agreement. However, limited referencable accounts exist in
certain target industries at this time. There can be no assurance that the
Company will develop a sufficient number of referencable customer accounts
across all industry segments without significant adverse impact on near term
sales results or that this sales operations reorganization will sustain or
improve long term sales results.
In addition, the Company recently formed a separate division to provide
business software products and services that address the specific needs of
medium-sized organizations. While the Company expects this division to be
a successful component of the overall business, the middle market for software
applications is extremely competitive, more price sensitive and generally
includes a higher component of bundled implementation services when compared to
the Fortune 1000 enterprise application market the Company has traditionally
targeted. There can be no assurance that the Company will be successful in
penetrating this market or that operations in this marketplace will be
profitable.
EXPANSION OF FACILITIES
Recently, commercial building vacancy rates have significantly dropped
in many of the major metropolitan markets where the Company has significant
operations. As a consequence, the Company expects to experience increasing
difficulty in obtaining additional space within which to expand its operations.
In addition, the increased demand for office space has caused commercial rental
rates to increase substantially. Failure to either obtain space, or obtain it on
reasonably attractive commercial terms, may inhibit the Company's ability to
grow, or otherwise adversely effect the Company's operations and financial
results.
VOLATILITY OF STOCK PRICE
As is frequently the case with stock of high technology companies, the
market price of the Company's stock has been and may continue to be quite
volatile. Factors such as quarterly fluctuations in results of operations,
announcements of technological innovations by the Company or its competitors or
the introduction of new products by the Company or its competitors, and
macroeconomic conditions in the computer hardware and software industries may
have a significant impact on the market price of the stock of the Company. If
revenue or earnings in any quarter fail to meet the expectations (published or
otherwise) of the investment community, there could be an immediate impact on
the Company's stock price. In addition, as described in the " Possible Adverse
Effects of Recent Securities Issuances" section above, the Company has issued
shares, stock options and warrants which, if sold directly or exercised and sold
on the open market in large concentrations, could cause the Company's stock
price to decline in the short term. Additionally, recent tax legislation lowered
tax rates on capital gains. This could potentially result in increased sales of
all U.S. equity securities, including the Company's common stock. Such sales, if
material, could negatively impact the stock price. The Company makes no
assurance as to when and if such a short term stock price decline may recover.
Furthermore, the stock market has from time to time experienced extreme price
and volume fluctuations which have particularly affected the market price for
many high technology companies and which, on occasion, have been unrelated to
the operating performance of those companies. These broad market fluctuations
may materially adversely affect the market price of the stock of the Company.
POSSIBLE ADVERSE EFFECTS OF RECENT SECURITIES ISSUANCES
The Company has outstanding warrants to purchase 4,000,000 shares of its
common stock which have exercise prices below the current market price of the
common stock. The exercise of these warrants and resale of the underlying shares
could adversely affect the market price of the Company's common stock. At
December 31, 1996 the Company had 6,869,747 exercisable options outstanding to
purchase common stock which have exercise prices below the current market price
of the common stock. The exercise and sale of a significant number of such stock
options for the underlying shares could adversely affect the market price of the
Company's common stock.
21
<PAGE> 22
INVESTMENTS AND LIQUIDITY
The Company's short-term and long-term investments consist primarily of
high quality municipal bonds, U.S. government securities, corporate debt
securities and tax-advantaged money market instruments. Despite favorable credit
ratings on these investments there can be no assurance the issuing agencies will
not default on their obligations which may result in losses of principal and
accrued interest by the Company. While operating activities may provide cash in
certain periods, to the extent the Company experiences growth in the future,
operating and investing activities may use cash and, consequently, such growth
may require the Company to obtain additional sources of financing. In addition,
material acquisitions of complementary businesses, products, technologies and
capital expenditures may require additional sources of financing. There can be
no assurance that the Company would be able to obtain additional sources of
financing or additional financing at terms favorable to the Company.
22
<PAGE> 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is party to various legal disputes and proceedings arising
from the ordinary course of general business activities. In the opinion of
management, resolution of these matters is not expected to have a material
adverse effect on the results of operations of the Company. However,
depending on the amount and timing, an unfavorable resolution of some or all
of these matters could materially affect the Company's future results of
operations or cash flows in a particular period.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8 - K
(a) Exhibits
27.1 Financial Data Schedule - Nine months ended September 30, 1997
27.2 Restated Financial Data Schedule - Nine months ended September 30,
1996
(b) Reports on Form 8 - K
No reports on Form 8 - K were filed during the quarter ended September 30,
1997.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 12, 1997
PEOPLESOFT, INC.
By: /s/ RONALD E. F. CODD
------------------------------------------
Ronald E. F. Codd
Senior Vice President of Finance and
Administration and Chief Financial Officer
(Principal Financial Officer)
24
<PAGE> 25
PEOPLESOFT, INC.
INDEX OF EXHIBITS
EXHIBIT # EXHIBIT TITLE
- --------- -------------
27.1 Financial Data Schedule - September 30,1997
27.2 Restated Financial Data Schedule - September 30, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES
CONTAINED IN THIS FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 222,369
<SECURITIES> 98,034
<RECEIVABLES> 272,576
<ALLOWANCES> 14,358
<INVENTORY> 0
<CURRENT-ASSETS> 609,106
<PP&E> 179,108
<DEPRECIATION> 69,271
<TOTAL-ASSETS> 775,933
<CURRENT-LIABILITIES> 417,671
<BONDS> 0
0
0
<COMMON> 1,110
<OTHER-SE> 357,152
<TOTAL-LIABILITY-AND-EQUITY> 775,933
<SALES> 293,418
<TOTAL-REVENUES> 55,080
<CGS> 15,440
<TOTAL-COSTS> 173,790
<OTHER-EXPENSES> 276,204
<LOSS-PROVISION> 2,733
<INTEREST-EXPENSE> 336
<INCOME-PRETAX> 112,041
<INCOME-TAX> 43,233
<INCOME-CONTINUING> 68,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,808
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES
CONTAINED IN THIS FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION, AS DISCUSSED IN NOTE 1 IN NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS, ALL AMOUNTS HAVE BEEN RESTATED TO REFLECT THE MERGER WITH
RED PEPPER EFFECTIVE OCTOBER 16, 1996 AND ACCOUNTED FOR AS A POOLING OF
INTERESTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 135,434
<SECURITIES> 41,897
<RECEIVABLES> 151,227
<ALLOWANCES> 6,711
<INVENTORY> 0
<CURRENT-ASSETS> 354,024
<PP&E> 125,163
<DEPRECIATION> 35,824
<TOTAL-ASSETS> 468,193
<CURRENT-LIABILITIES> 251,233
<BONDS> 0
0
0
<COMMON> 1,016
<OTHER-SE> 128,211
<TOTAL-LIABILITY-AND-EQUITY> 468,211
<SALES> 167,687
<TOTAL-REVENUES> 302,385
<CGS> 8,274
<TOTAL-COSTS> 88,699
<OTHER-EXPENSES> 152,875
<LOSS-PROVISION> 1,947
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> 56,864
<INCOME-TAX> 22,746
<INCOME-CONTINUING> 34,118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,118
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
