All,
I came across the following letter to Oracle employees from the CFO. An Oracle employee posted it on America Online. It's pretty interesting and I thought you might like to read it. It's not every day that upper management lets a letter like this out for all to read. Sorry about the tables not lining up. I didn't want to use fixed font for something this long.
Dan
____________________
Date: 15 Jan 98 12:57:54
From:"JEFF HENLEY, CHIEF FINANCIAL OFFICER" <SM3.US.ORACLE.COM>
To:SENDMAIL
Subject:OUR STOCK PRICE
Reply-to:INVESTOR
X-Orcl-Application:Original List:ORACORP
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The Stock Price
A month has passed since we announced our Q2 financial results which showed that our revenues grew 23% in dollar terms, profit was $187 million, slightly higher than last year's Q2, and cash flow was very strong with cash and equivalents ending at $1.7 billion. Oracle's stock dropped sharply the next day on record trading volume. Within weeks Oracle was named in a class action securities lawsuit claiming we knowingly misled investors (we missed earnings expectations by 4 cents per share).
While Oracle's stock has been driven down for a variety of reasons, two issues stand out. First, investors don't like surprises and punish stocks when they miss Wall Street expectations. Second, investors are concerned that license growth for the past two quarters has slowed down and that this suggests much slower long-term growth than they anticipated.
The other point I'd make is that technology stocks have what's called a "high beta," or volatility index, which means that upward and downward price movements are much greater and occur more frequently than in most other industries, even when expectations are being met. One only has to look at the highs and lows in calendar year 1997 to see what I mean when it was not uncommon for stock prices of high quality companies to move within more than 50% ranges.
STOCK PRICES '97 Hi '97Low % chge
3COM $77.38 $24 -69%
Applied Materials $54.19 $17.34 -68%
Sun $53 5/16 $25 7/8 -51%
Cisco $60.63 $30.17 -50%
Oracle $42.13 $21 -50%
Intel $102 $62 7/8 -38%
Lastly, securities class action lawsuits are often filed against public companies when the value of the stock has dropped dramatically in a short time. You should all know that we believe their allegations are false, and that we don't intend to settle with these guys. If they care to go to court then so be it--we're confident they will lose.
Our Business
Now let's get on to the real issue here which is what's going on in our database and applications businesses. You all need to know this, and you need to be able to communicate this to our customers and other outsiders.
Let me start with some recent research by Soundview/Gartner. Below I'm showing their spending index for some leading hardware and software companies (applications companies were not included in this particular study). Each year, Gartner asks a lot of customers whether they intend to buy more, the same or less from a particular company in the next year. This translates into a spending index. A higher percentage indicates a deeper commitment to a vendor's products and services.
In the latest December report Oracle came out third highest and unchanged from the prior year's report. Here are the results:
Microsoft 75%
Cisco 59%
Oracle 58%
Compaq 46%
Dell 45%
Sun Micro 43%
HP 42%
Netscape 36%
EMC 35%
IBM 33%
3Com 28%
Bay Networks 16%
Computer Assoc 2%
Informix 1%
Sybase 0%
DEC -9%
Source: Soundview/Gartner, December 1997
This is a very important chart. It says our franchise is solid and our customers expect to buy more from us.
The Database Business
There seems to be a disconnect between this strong input from our customers and the slowing rate of growth we experienced in our past two quarters. Looking ahead, we have reason to be confident.
First, we're going through a transition similar to that which we experienced when we released Oracle 7. It will take 12-18 months for a lot of customers to upgrade to Oracle 8, plus it takes new customers significant time to implement new purchases. Everything we know says Oracle 8 is more solid than 7 was at the same time (roughly 6 months from introduction), so that over the coming months we will have a powerful platform to "upsell" new options such as partitioning, parallel server, objects, java, etc., which should generate a lot of new revenue.
Second, we're not seeing slow database growth across the board which shows that while we've got some comparison problems in areas such as telecommunications where we've had huge years recently, or Asia Pacific where economic/currency issues have temporarily reduced revenue growth, we are still seeing good growth in many areas. For instance, in the General Business sector and the Major Accounts sector in the U.S. we are seeing good growth.
Third, we have an opportunity to expand our database penetration into some very large, attractive, "new markets" such as the low end, high end, internet, and consumer markets. These are either unpenetrated or brand new markets which offer large revenue opportunities in the coming years.
Customers need to understand that the database market isn't dead just like it wasn't dead in 1990-91. I remember coming into Oracle in early 1991 and hearing many people tell me that the database market was mature. I think we have a lot of opportunities, just like I thought we did then. Also, we are more clearly the database leader now than in 1990; even on NT we now enjoy number one market share.
The Applications Business
As far as the applications business goes, the situation is quite a bit different. While we enjoy a strong number two market share we don't have as prominent market position as we do in database. Also, all competitors are growing nicely and more consistently. Outside critics aren't worried about a slow-growing applications industry - they're worried about how competitive we are. So what's happening in Applications? First, we had very slow applications license growth quarters in Q1 FY97 and Q2 FY98. People tend to focus (particularly our competitors) on a slow-growth quarter as a sign that we're losing ground, but then they disregard a high growth quarter. For instance, in Q1 FY97 we grew 4% and in Q1 FY98 we grew 96%. We heard very little about Q198 and a lot about Q197 (and more about Q298). The facts are that if you look back over the last 3 calendar years we have grown 2 times faster than SAP in constant dollars on an annual total revenue basis and over 1 1/2 times faster on a license only basis, despite the fact that we've had several slow-growth quarters during that 3-year period.
Since they report in German currency, they've been able to take advantage of the strong dollar, so their reported growth appears to be stronger than their local currency growth actually is - but even that has not enabled them to report higher total revenue growth for any of the past 3 calendar years.
In the case of Peoplesoft, they grew faster than we did in our Q2, but in the previous two quarters, Oracle's total applications revenue grew faster than theirs did in the comparable quarters, so one quarter's growth rate is not truly reflective of a long term trend.
We have told Wall Street that Q2 was below our expectations and that we expect to show good applications license growth in Q3 based upon our current global forecast.
Here is our data and that of our largest applications competitors for the most recently reported 4 quarters (excluding the impact of currency):
Total Rev Growth License Growth
Oracle 85% 58%
SAP 49% 43%
Peoplesoft 87% 77%
Baan 72% 96%
The bottom line is that despite quarterly variations the real annual growth rates speak for themselves.
Second, we think our products and technology are in better competitive shape than a year ago, since we've completed our 10SC global transition and offer our new web forms version as of last week. We continue to grow our development spending at aggressive rates since we are firmly committed to this business, and our services businesses continue to grow at consistent, rapid rates.
In summary, our biggest problems have been that we haven't always single-mindedly focused on our applications business like a pure applications company and we have several spotty quarters which our competitors have used to confuse the outside market whenever they can.
One final point is that we've acknowledged publicly that Q2 was a "wake-up call" for Oracle since it was the first time in 7 years we've missed market EPS expectations and we don't want it to happen again. In the past month, the Management and Executive Committees have held numerous meetings and we've concluded that we need to slow down changes in our organization and actually simplify our organization so we can execute more quickly and effectively. In the coming months, we intend to focus everyone's efforts on fewer, more immediate actions and work our way back to high efficiency and greater financial success. Good Q3 results are the first and most important step to show progress.
Oracle is a great franchise with a strong financial position. Survey results confirm it. We can learn from what happened in Q2 and focus even more intensely on the enormous opportunities which lie in front of us.
Jeff Henley
Chief Financial Officer |
