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The Outlook for Oracle: Unclear

By Amy Tsao On June 18, Oracle Corp. (ORCL) finally gave investors something to smile about. The battered database-software company came through on its promised earnings per share for the fiscal fourth quarter ended May 31. The markets bid the stock up on the news, from just under $9 a share to $9.36. However, it slid back on June 19, to $8.56.

To most analysts' surprise, Oracle, which has missed quarterly sales forecasts for four out of the past six quarters, came through this time. It showed a profit of $655.9 million, or 12 cents per share, after a one-time impairment charge. More impressive, total sales for the world's No. 2 software company hit $2.8 billion for the quarter, beating the Street's average expectation of $2.6 billion.

Time to declare victory? Not so fast. Though earnings were better than expected for the Redwood Shores (Calif.) software giant, "in the grand scheme, this company is still having problems," says Allan House, investment analyst at Federated Investors. Until it finds other major avenues of growth beyond the database business, House sees a growth-rate percentage somewhere in the teens. "Right now at 21 times forward earnings, it's fully valued at $9," he says.

SOUR TIMES. In the 2002 BusinessWeek IT 100 -- a ranking of the world's top tech companies -- Oracle has jumped to the 55th spot, up from 66th in 2001. But sharp cutbacks in Oracle's spending were the main reason why its quarterly profits met forecasts. It improved operating margins for fiscal 2002 to 37%, up from the record high of 35% set last year. But both sales and profits declined year-over-year, a first for Oracle.

Larry Ellison & Co. can surely blame the sour economy for a good portion of its woes. Still, many who follow Oracle see deeper problems. Wall Street is still fretting over how its revenue will grow over the long term -- a point CEO Ellison didn't seem much interested in addressing during his quarterly earnings call.

He kept pointing out that Oracle is still No. 1 in databases. But the company lowered its earnings-per-share guidance for the current quarter to a range of 6 cents to 7 cents, and it predicted that software sales will fall anywhere from 15% to 25%. "Visibility is very limited, as was the case over the last 18 months," said Chief Financial Officer Jeff Henley during the earnings call. The execs didn't commit to much more, noting that, while Oracle expects to reverse its revenue decline soon, it's not predicting significant improvement in tech spending for the next six months.

FRUSTRATED CUSTOMERS. Some suspect that Oracle's widespread reputation as a difficult vendor to deal with is hurting it amid an already ugly tech-spending environment. "Clients call all the time and express great frustration. For that reason, we see companies considering alternatives," says Betsy Burton, analyst at market researcher Gartner Inc. "We believe that has led to Oracle losing share [in databases]."

According to Gartner Dataquest, as of yearend 2001, IBM (IBM) is now No. 1 in the database-software market with a 34.6% market share (with help from its Informix acquisition), vs. 32% for Oracle and 16.3% for Microsoft (MSFT).

Ellison disputes the Gartner data, saying other surveys, which measure market share differently, show Oracle's share as high as 70%. "I don't see how we can be losing share to IBM. All the evidence we can find is that we are increasing share," he said during the call. Still, licensing revenues for the quarter in Oracle's core database business -- both new licenses and updates -- came in at $1.4 billion, down from $1.7 billion the year-ago period.

SOLID BASE. Oracle has long maintained that growth in its application software for customer-relationship management (CRM) and enterprise resource planning (ERP) will provide new revenue streams. And some still see potential there. "If they can make it work, the company has a large installed base to expand on," says Brian Flanagan, analyst at Minneapolis-based AAL/LB Capital Management.

But as evidenced by the recent quarter's results, Oracle hasn't quite been able to convert its database users to its other software products. New application-software license and update revenues fell 16% from the year-ago quarter, to $385.3 million.

Part of the problem is tighter budgets. And even though Oracle's products in the faster-growth CRM and ERP software segments are competitive, clients continue to consider them alternatives to products from leaders in the field SAP

and Siebel (SEBL). "I don't think there's a major compelling reason for buying Oracle software," Gartner's Burton says.

How can Oracle reignite its top line? For starters, it will have to focus on improving its relationships with customers and working out more attractive pricing structures. "That would turn around perception and help revenues," she says. So far, Burton says she doesn't see Oracle doing much to change. "I don't think they've articulated or identified how they will improve customer relations as a strategic plan. They have realized that their revenue growth is going to come from the current customer base, but they don't know how to get the customer base turned on to them."

"TOO RIGID." Oracle acts as if clients have nowhere else to turn, some analysts say. "They seem to have an assumption that losing customers just isn't going to happen, that clients are too dependent on them," says Carl Olofson, program director of information and software research at IDC Research. Of course, it's risky and painful for users to switch such huge systems, but if enough big customers feel they can delay their upgrade processes with Oracle or choose a cheaper provider altogether, its revenues will suffer.

Unattractive pricing is another issue Oracle needs to address, analysts say. The list price for its standard 9i edition database is $15,000 per processor, while the upgrade version costs $40,000 per processor, and the features within it cannot be bought à la carte. Even with heavy discounting, this is an expensive proposition for many customers -- especially in a tough economy, Olofson notes. "This packaging is too rigid, and they need to provide a smoother evolutionary path by allowing companies to adopt the features over time," he says.

These days, Oracle stock certainly looks cheap next to other software companies. But although it's expected to remain one of the more profitable tech outfits, Oracle's short-term horizon is still clouded. Federated's House views the company as something of a haven. He sells when the stock hits the $10 to $11 range and buys it when it falls closer to $7.

Gone are the days, however, of Oracle being one of the hottest of hot tech stocks. Any rebound in tech spending will help, but Oracle needs to show that its attempts to branch out into new areas and new selling strategies are working. Tsao covers the markets for BusinessWeek Online in New York

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