Boring Portfolio

Boring Selling ORCL
December 09, 1997

**This trade is being made under the regular portfolio policy, namely, once The Fool announces an intention to trade, that trade will be made within the next WEEK, as opposed to the next day. For more detail, please read the "New Trades" section of the Hall of Portfolios.**

Selling 150 Shares of ORCL

Oracle Corp.
Nasdaq: ORCL
500 Oracle Parkway
Redwood Shores, CA 94065
(415) 506-4073

ANN ARBOR, Mich. (Dec. 9, 1997) /FOOLWIRE/ -- Oracle Corp. (Nasdaq: ORCL) lost nearly 30% of its market capitalization today after reporting sales and earnings results that "clearly disappointed" company executives... and shareholders.

Revenues increased a decent 23% to $1.61 billion, but profits failed to keep pace -- earnings per share increased by only a penny from a year ago, or less than 6%, to $0.19.

The company attributed part of the shortfall to the strong dollar. Asian revenues were particularly hard hit by a 14 percentage-point negative currency exchange rate impact, and total revenue growth would have been six percentage-points higher had revenues not been translated from local currencies into dollars. It should be noted, however, that this currency impact was pretty much in line with what the company had projected at the end of the preceding quarter, and so it had already been factored into the Street's expectation of $0.23 per share in earnings.

In a hastily convened conference call with analysts last night, Oracle management conceded that the company's challenges extend well beyond the strong dollar, and even beyond the current turmoil in Asian economies. Sales in the Americas fell well below the company's and analysts' expectations, for example, increasing 29% to $861.6 million. Part of the explanation for that appears to be that database sales have reached a near saturation point in the crucial telecommunications market, and sales to the highly important government sector are also decelerating sharply.

The release of Oracle8 this summer has not yet spurred sales of that product, as many customers have displayed a reluctance to rewrite their complex applications to take advantage of features in Oracle8 for which they apparently do not feel a driving need, at least not yet. According to a story published in the San Francisco Chronicle last month, only 15% of Oracle customers had upgraded to Oracle8.

However accurate that percentage may be, it is undeniable that total sales of Oracle's core database products grew by just 3% in the quarter that just ended as compared with the year-ago period. And that comes on the heels of sluggish single-digit revenue growth in the preceding quarter.

Sales of Oracle applications, which run on top of the database, were also poorer than expected in the November quarter, rising only 7%. As Oracle expands its offerings in this area, it must contend with strong products and service from such companies as German-based SAP, Dutch-based Baan (Nasdaq: BAANF), PeopleSoft (Nasdaq: PSFT), and others.

Overlaying all of this is an industrywide migration from UNIX-based computing environments to ones operating on Windows NT. Oracle's NT-based products generally carry lower profit margins than its Unix-based ones.

In addition to challenges related to the products it sells are ones associated with how Oracle sells them. The company undertook a major reorganization of its sales force in the past year, realigning sales teams around "vertical" markets and products, such as for financial services, oil and gas companies, and consumer package-goods companies. There has also been a shakeup in international sales directors.

All of this has been further -- and, in retrospect, unnecessarily -- complicated by elaborate quota, commission, and incentive schemes intended to spur sales but apparently having the effect of creating confusion and misalignment within Oracle's sales force.

Then there's the challenge of how Oracle transitions from an organization that has relied almost exclusively upon its own sales force to one that partners much more extensively with value-added resellers.

None of these challenges are insuperable, and even all of them taken together could be addressed effectively by a focused, united management and board. This individual investor has listened to Oracle's management over the course of a number of hours during the past one year-plus, and I've read a great deal more and spoken with many folks who know Oracle well. It may well be my shortcoming more than it is theirs, but I simply can't achieve the level of comfortable confidence in Oracle's management that I'd like to have. Last night, for example, they admitted that the assumptions underlying their business plan for Q2 were "naive." Yet they stuck to that plan to the bitter end, as CEO Larry Ellison took the world's stage to boast about how his company would "blow away" Wall Street's expectations.

Speaking of whom... nowhere is my problem with Oracle's management more acute than it is with Larry Ellison. As his company has grappled for more than a year with the issues outlined above, Ellison has pursued a counter-productive crusade for a nebulous computing "solution" -- the "Network Computer" -- the principal advantage of which appears to be that Ellison's self-identified nemesis, Microsoft's Bill Gates, won't be able to control it.

As for Oracle's board of directors, it's heavily larded with company insiders plus such figureheads as former G.O.P. presidential wannabe, Jack Kemp. I don't look for much in the way of strong, independent guidance coming from there.

Consider this calendar year that is about to end. Oracle faced no real challenge in its core database market, now that Sybase and Informix have been marginalized. The Year-2000 issue is causing companies large and small to focus on their database software and has heaped huge windfalls of cash upon dozens of software companies that sell their products and services to businesses. This year could have been, and should have been, a bonanza for Oracle. Yet the world's second-largest software company largely frittered away its substantial advantages by orienting its products, services, and "mindshare" around the NC, an organizing idea that sorely lacks in customer demand.

If Cisco Systems (Nasdaq: CSCO) epitomizes a corporate philosophy of listening closely to customers and doing whatever it takes to provide them with the solutions they want and need, then Oracle has created for itself, however inaccurate it may be in reality, the image of an unfocused, arrogant enterprise that is hell-bent on selling you something that you really don't want and aren't at all sure you need. Just IMHO, of course.

Then there's the matter of valuation. The revised consensus forecast of analysts is that Oracle will make $0.90 per share for fiscal 1998, which ends in May. That's down from around $1.10. The current mean estimate for FY99 has been chopped from its former $1.41 down to $1.12, according to First Call.

That's 24% annual growth, and that's nothing to sneeze at. But even after getting clobbered today, Oracle is trading at around 25 times the FY98 forecast, so the stock is not exactly a screaming bargain.

Are these earnings forecasts believable? Who knows? Oracle might well exceed them -- and I hope it does. But it might also miss them, and so the risk-reward ratio is not exactly compelling -- at least not to me.

Apparently not to some others, either. Even though Oracle's stock opened this morning at a deeply discounted $23, shareholders continued to dump it by the boatload. Trading volume in Oracle exceeded 170 million shares, an all-time record for trading in any single issue.

I don't intend to burn my bridges to Oracle. Should the company manage to articulate a sensible plan to work itself out of its current predicament, and then begin to implement it, I could well repurchase at some point -- even perhaps at a price above where I sell the Borefolio's shares. But for now at least, I'm out.