Lisa Baertlein
PALO ALTO: Analysts following Oracle Corp. think the world's No. 2 software
maker will end its all-important fourth quarter with a whimper on Thursday, hurt
by sluggish technology spending and challenges from industry rivals.
"Keep in mind Oracle has had the misfortune of having its historically
huge fourth quarter arrive in the midst of a global economic slowdown,"
influential analyst Chuck Phillips of Morgan Stanley Dean Witter said on
Thursday.
Oracle generally reaps about one-third of its sales during the fourth quarter
and is particularly dependent on closing large deals in the final days of its
selling periods. Investors have been unnerved this week by profit warnings from
network computer maker Sun Microsystems Inc. and telecom gear seller Alcatel ,
and fear that Oracle may join the list, as the software maker grapples with
economic and competitive challenges.
"As we conduct end-of-quarter channel checks, large deals are still hard
to come by and discounting remains quite heated in both database and
applications segments," Merrill Lynch analyst Chris Shilakes wrote in a May
23 report.
Oracle, based in Redwood Shores, California, is on a fiscal calendar and
reports in mid-June, before many other software makers. Its third-quarter
warning in March sent sector stocks sliding.
Analysts increasingly skeptical
Oracle Chief Financial Officer Jeff Henley on May 17 said he was sticking to his
target for flat fourth-quarter earnings compared with a year ago, when corporate
America was on a buying binge fed by its desire to catch up with tech-savvy
dot-com rivals.
"It may be less, we just don't know, but we're still going to try to
achieve 15 cents," Henley told Australian reporters. Analysts, however,
grew increasingly skeptical and 11 out of 32 who follow Oracle lowered their
estimates during the quarter, according to Thomson Financial/First Call, which
tracks Wall Street forecasts.
The current consensus forecast is for earnings of 14 cents per diluted share,
with a range of 12 cents and 16 cents. "The company went into this quarter
knowing things would be difficult and started pulling back on expenses
early," wrote Phillips, who expects Oracle to hit the Street's consensus
estimate.
For the year, analysts presume that Oracle will earn 41 to 46 cents per
diluted share, with an average estimate of 43 cents. If the company meets that
forecast its annual results will be 9 cents better than in fiscal 2000,
according to Thomson Financial/First Call.
Database obstacles
Financial and industry analysts said Oracle faces numerous obstacles in its
flagship database business - where related software, server and service revenue
contributed more than 70 percent of last year's total sales.
International Business Machines Corp. and Microsoft Corp. are gaining market
share at a time when database buyers are reporting frustration with Oracle's
"power unit pricing," which can push its costs higher those of its
rivals.
"Every customer we've spoken with that's selected (IBM's) DB2 over
Oracle has done so for one reason: price. No one mentions proprietary features
of DB2 and they usually tell us they are willing to give up some features given
the huge price difference," Phillips wrote.
Elsewhere, e-business software sellers such as SAP AG and Siebel Systems Inc.
- which compete with Oracle in the applications space - are promoting
International Business Machine Corp.'s database instead of Oracle's 8i product.
Oracle also has delayed the release of its new 9i database about one month to
mid-June. The new database will be sold on a different pricing structure and
will give users that tie together databases - a process called clustering -
capabilities other vendors don't offer.
e-business issues
Oracle also has issues in what is often seen as its fastest-growing business,
e-business applications. The company's critical sales automation, customer
service and supply chain management software have yet to gain share against
best-of-breed solutions from the likes of Siebel and i2 Technologies Inc. , Banc
of America Securities analyst Bob Austrian said.
The company stumbled out of the gate with its 11i e-business software suite,
shipping too early and too broadly when quality problems weren't yet worked out,
Phillips wrote. "The good news is that much of this has been resolved with
the 11.5.3 release and the patches will be consolidated in an 11.5.4 release in
June," he said.
Nevertheless, the economy is prompting potential customers to rethink
e-business software purchases.
"Instead of rushing in with fears of falling behind to competitors,
customers are now demanding more tangible (return on investment) benefits and,
increasingly, looking first to pilots before jumping in with both feet,"
Lehman Brothers analyst Neil Herman wrote in an software industry report.
In an effort to deliver faster returns to customers while boosting e-business
software sales, Oracle in April announced a program based in its 11i suite that
promises to automate particular business flows in 90 days.
Oracle's stock rose $1.26, or 8.75 percent, to $15.77 in late-afternoon
Nasdaq trading. It has outperformed Standard & Poor's software index by
about 8 percent since the end of 1999. During that time, Oracle shares have lost
a little more than 43 percent of their value, while the index is off nearly 48
percent.
(C) Reuters Limited 2001.