Oracle chief executive Larry Ellison is famed for his devotion to all things Japanese. So his thoughts on Tuesday morning as the Oracle stock price plummeted by a third, at least partly due to the meltdown of the Japanese economy, can only be guessed at.
As Oracle shares saw 10 points knocked off their value in a few hours following the release of disappointing second quarter results, some Wall Street observers questioned whether the market leading database company was set to follow arch-rivals Informix and Sybase into its own financial crisis.
According to Oracle?s chief financial officer Jeff Henley, the company is "clearly disappointed" with the results for the second quarter ended 30 November. Revenues increased 23 per cent to $1.614 billion from the comparable period last year, while net income for the period was $187 million compared to $179 million. The 18 cents a share profit was well below market predictions of 23 cents.
Wall Street analysts have been tough on Oracle in recent years when the company met their expectations, but did not exceed them, so it was hardly surprising that their reaction to a shortfall in expectations was merciless. Morgan Stanley, Lehman Brothers, Bear Stearns and Paine Webber all cut their ratings on Oracle stock from 'buy' to 'neutral'.
The knock-on effect was significant as investors raced to dump the company?s stock. On an average day, some six million Oracle shares change hands; by 8.30 on Tuesday morning, the total stood at 76 million shares and rising, making the company the most actively traded stock on the Nasdaq exchange. By 4.30 that afternoon (Eastern Pacific Time) that total had risen to 169.4 million shares, at least $3.9 billion worth of stock.
The company?s Asia-Pacific operation was blamed for much of the shortfall. In US dollar terms the region only managed a one per cent revenue increase, against 29 per cent in the domestic US market, although this was still below expectations. The former trouble spot, Europe, redeemed itself somewhat with a 24 per cent US dollar revenue rise.
The company?s argument that the Asia-Pacific region was to blame was supported on Tuesday morning when a monthly report from Japan?s Economic Planning Agency admitted that the economy had stalled and could not be regarded as being in "gradual recovery" mode.
The downward trend in the Japanese economy has been worsened by last month?s sharp falls in Tokyo share prices, triggered by Asian currency turmoil and the collapse of well known bank and securities firms, such as Yamaichi Securities. So Oracle?s poor performance in the region is perhaps only to be expected - although a pronouncement from Oracle ally Netscape on how well it expects to do in the short term in Asia-Pacific was unfortunately timed on Tuesday.
There are, however, other disturbing aspects to the Oracle shortfall, which cannot simply be dismissed as troubles in the Far East. Year on year, total licence revenues grew by a mere one per cent with server revenues up by only three per cent. Unix licence revenues fell by four pre cent, while the NT-led desktop business increased by one third.
But the really bad story was in the applications business - identified as a critical growth area for the company - which had been expected to grow up 50 per cent but in the event only managed seven per cent. The only real good news came from the services side of the business which reported 41 per cent year on year growth.
Oracle8 - released in June this year - has had little impact on the company?s revenues to date, partly because customers need to change their applications design to take advantage of all the features in the new version of the database. The shipping of release 11.0 of Oracle applications next March is expected to improve this position.
In addition, the company expects its installed base to migrate up onto Oracle8 in due course. This is not a problem comparable to the rejection by Informix customers of the object-relational Universal Server, or the quality problems experienced by Sybase with its System 10 product.
In terms of specific vertical market sectors, the former telecomms stronghold came in for a beating, a result according to the company of a "naively ambitious" strategy in a near saturated market. The party line here is that the firm has effectively been a victim of its own success with almost every major telecommuncations firm in the world standardised on Oracle software.
However, the company believes that the sector is not completely closed off yet, insisting for example that there are new opportunities to be had in Asia. In the mean time, the telcos' position as the historically largest selling vertical means that slower growth there impacts on total licence revenues.
In conclusion, the Oracle verdict on the second quarter is that the company had some unrealistic plans which were made worse by underestimating the full impact of the Asian situation. The comparatively low growth rates of this quarter are likely to repeated until the end of the current fiscal year, partly fuelled by the ongoing Japanese currency crisis.
But with the acknowledgement that Oracle?s stock was oversold and the subsequent downgrades and lowering of earnings estimates, there is in all probability a reasonable chance that the company can meet or even beat market estimates next quarter.
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