[Adam, you were right about this one - just a wee bit early ;)
Oracle's stock has lost over 10% in after hours trading, last
at around 17 which is 63% off of its high in September.
Deal Them Out: Delayed Sales Spark an Oracle Warning
By Joe Bousquin
3/1/01 9:32 PM ET
Updated from 5:24 p.m. EST:
Attention Oracle (ORCL:Nasdaq - news) shareholders: You've just been
After saying for months that its business wasn't feeling the impact of
an economic slowdown, Oracle said Thursday that revenue and earnings
would fall short of consensus estimates for its just-ended fiscal
third quarter. The culprit? Last-minute deals falling through because
of the economy, stupid.
"As late as last Friday, we still felt good about the quarter," said
Jeff Henley, Oracle's chief financial officer, on a conference call
with financial analysts after the markets closed Thursday. "Then on
Monday, we saw a few cracks, then some of the cracks got wider, and
on Wednesday, a significant amount of deals got deferred."
The cracks got wide enough, in fact, for nearly a quarter of a
billion dollars to fall through them. That's the gap between what
Oracle will report in revenue for its third quarter and the high
end of what Wall Street had expected.
The last days of a quarter are critical for Oracle's sales, which
are notoriously back-end loaded. In other words, Oracle, like many
enterprise software companies, completes a large portion of its
sales in the closing days of its financial period.
Larry Ellison, the company's notoriously outspoken CEO, said he
personally got involved in failed efforts to close the several
deals that would have made the difference between Oracle meeting
or missing investors' expectations.
"A lot of these deals were already approved at the mid-high level,
and once it got up to the CEO or CFO level, they were pushed off,"
Ellison said. "I think we have a lot of nervous executives looking
at this economy."
Oracle's announcement Thursday of estimated results came one day
after it closed the books on its quarter. The company reported
preliminary third-quarter earnings of 10 cents a share, a penny
ahead of the year-ago figure and 2 cents shy of the analyst
consensus quoted by First Call/Thomson Financial. The company
also signaled that its profit and revenue growth for coming quarters
will be less than it previously expected, though it declined to give
detailed projections. Before Thursday's preannouncement, the
consensus fiscal fourth-quarter earnings estimate was 20 cents per
share, or 25% over the year-earlier period.
Overall revenue rose 9%. Software license revenue, closely watched
because it is Oracle's mainstay and highest-margin product, grew by 6%.
That puts Oracle's third-quarter revenue at around $2.67 billion, some
$200 million short of the First Call consensus. The company plans to
report official results March 15.
Oracle shares were halted ahead of Thursday's news, but when the
shares were unleashed again, they ran and hid under the porch. After
closing up more than 12% at $21.38 during regular trading, the stock
fell 20% to $17.03 on Island ECN. Before Thursday's news, Oracle's
shares were down 26% since the beginning of the year.
The maker of enterprise software put its closely followed applications
revenue growth figure at 50% for the third quarter, well below the
75% Oracle was guiding toward on Feb. 13. Oracle has aimed to boost
applications revenue by 50% to 100% in fiscal 2001. Database revenue
growth will be flat to slightly negative, the company said. Oracle
forecast a 15% to 20% rise in that figure only two weeks ago.
Company executives were bullish in their estimates up and down Wall
Street in the days leading up to the warning. Not only did Oracle
executives give bullish presentations at investment conferences two
weeks ago, the company sharpened its horns at its AppsWorld users'
conference last week in New Orleans.
"I had dinner with Jeff Henley at the New Orleans event," said
Jim Pickrel, an analyst at J.P. Morgan H&Q, who had a buy rating on
the stock as of Thursday evening. "Any chance he had to introduce a
hedge clause into the conversation, he [didn't take]. Things change
fast, and I'm certainly not ruling out the scenario as they laid it
out, but that still creates surprise." (J.P. Morgan H&Q hasn't done
underwriting for Oracle.)
There will likely be a lot of sore ears on Wall Street Friday as
investors demand to know how company officials could have so
thoroughly failed to detect imminent problems. Henley, Oracle's
CFO for a decade, sounded a mea culpa in an interview with
"We were being as honest as we could be," Henley said about
Oracle's comments. "In hindsight, maybe we should have been more
conservative. But up until the last day, we still thought we were
going to make the numbers. We knew it was a risk, we knew the economy
was declining, and we were talking to clients and they were saying
they were going to sign. So, we were surprised, and I'm sure our
investors were surprised, too."
Analysts did say that Oracle's story was at least conceivable.
"This last-minute fall-off is not just being reported by them, so
that gives it a measure of plausibility," Pickrel said. "But you always
have to wonder, Were there really that many deals that were coming down
to the wire?"
You've also got to wonder what this means for other software companies
that have been bullish in the face of tough times. Because Oracle's
product line is so broad and addresses so many different areas of
software, analysts say it's inevitable that other companies will also
feel some pain.
Prominent enterprise software makers that haven't yet disappointed Wall
Street include Siebel Systems (SEBL:Nasdaq - news), PeopleSoft
(PSFT:Nasdaq - news) and BEA Systems (BEAS:Nasdaq - news).
"I would think that many other software companies out there are now
going to have to go out and scrub their pipelines as well," said
Jon Ekoniak, an analyst with U.S. Bancorp Piper Jaffray, who had a
buy rating on Oracle Thursday night. "It will be interesting to see
how other companies are impacted." (His firm hasn't done underwriting
for the company.)
Even as his minions were talking up the company's prospects, CEO
Ellison was having a yard sale for his Oracle shares. Ellison sold
more than 29 million Oracle shares, for approximately $895 million,
during January alone, according to Web site InsiderScores.com.
Company officials said Ellison had to sell those shares because
they were part of an options grant that was due to expire.
"Millions sound like a lot, but relative to what he owns, it's
really not that significant," Henley said. Ellison still holds
1.3 billion shares, or 23% of Oracle's total.
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