How will Oracle fare?
February 28, 2001 12:00 AM ET
by Michelle Rushlo
The so-called four horsemen of the Internet
economy were an envied bunch. The
executives of Sun Microsystems (SUNW),
Cisco Systems (CSCO), EMC (EMC) and
Oracle (ORCL) saw nothing but blue skies.
Then the dark clouds rolled in with a
vengeance this winter.
Cisco and Sun had to guide down investor
expectations, and even storage powerhouse
EMC has hedged its bets by lowering the
range of its revenue target.
Oracle, however, has remained eerily silent.
Feeling cautious
The database and business applications maker completes its fiscal
third-quarter today and will announce its earnings in a couple of
weeks. While most analysts say the company is unlikely to blow its
third quarter, many are cautious and especially unsure about the
upcoming fourth quarter.
"Most people are feeling pretty cautious about [Oracle]," said First
Albany analyst Mark Murphy, who says he thinks there's about a 30
percent chance the company will miss earnings expectations for the
third quarter.
It's possible that Oracle may sidestep the macro economic
slowdown, he said, but "the one sector people thought would be
immune from this was network storage and it wasn't. If the most
powerful sector is not immune, why is anybody going to be
immune? That's a tough question."
Lowered expectations
And Murphy isn't alone in expressing uncertainty about Oracle.
Several investment firms have cut their earnings expectations,
including Bank of America and Goldman Sachs, both of which
trimmed expectations on Oracle and a host of other software
companies Tuesday.
Oracle officials declined to comment, saying they are in the
mandated earnings quiet period. They have not changed their
guidance since their last quarter conference call.
Most analysts say they would not be surprised if revenue from
Oracle's database business, the mainstay that accounts for
two-thirds of sales, is lower than expected. That was the reason
cited in recently revised analysts' earnings projections.
The database market is fairly mature, which has made it harder for
Oracle to grow and harder for it to avoid the larger slowdown.
"When you are the market, there's no way to make up for slowing,"
said Epoch Partners analyst Mark Verbeck.
Depending on services
Andrew Brousseau, an analyst with SG Cowen Securities, said
that's one of the reasons revenue may come in a little lighter than
the $2.9 billion analysts' consensus estimate. But he said the
company has enough room in its cost structure to pull back
spending and still hit the 12-cents-per-share earnings expectation.
Brousseau points out that its services business, which accounts for
more than half of revenue, is relatively dependable. "In good times,
that's been a boat anchor for them, but in bad times, it's been a
source of visibility."
However, analysts are generally still expecting good growth from
Oracle's business applications sales. The sale of financial,
customer relationship management and other business applications
is a much smaller portion of the overall business than databases,
but it is the portion Oracle investors are banking on for growth.
Richard Davis, an analyst with Needham & Co., said his checks
three weeks ago showed that Oracle's business application sales
seemed to be going well.
But he did note that, "the whole gripe against enterprise software is
you don't know what you're going to earn until the last week of the
quarter," making forecasting difficult.
Slowdown may help
Verbeck said overall, the slowdown may in fact help Oracle sell
more business applications.
He said because the business application market is much less
mature than the database market, Oracle has the opportunity to
take market share. "I think it's going extremely well," he said.
Davis agreed, saying he thought the slowdown was giving leading
vendors like Oracle a chance to move in on smaller players.
Given the slowing economy and the collapse of numerous high-tech
companies, many large enterprises are less inclined to go with less
proven software vendors, he said. Fearing small vendors could go
belly-up, the buyers are saying, "Hey, show us your balance
sheets."
Concerned about Q4
What many analysts say they are most concerned about is
Oracle's upcoming fiscal fourth quarter, which ends in May.
Jon Ekoniak, an analyst at U.S. Bancorp Piper Jaffray, said the
fourth-quarter outlook remains fuzzy. He said he wouldn't be
surprised to see Oracle reduce expectations for that quarter, which
is traditionally a big revenue quarter for the company.
The consensus estimate from First Call/Thomson Financial calls for
revenue of $5 billion for the quarter, a sizable jump from the $2.9
billion expected this quarter.
Ekoniak said the slowdown in growth of hardware sales, as cited by
Sun officials last week, could catch up with software providers like
Oracle. "Hardware is the first area to be hit and it has already been
hit."
He also said growth in Oracle's business applications business
could be hampered as the economy staggers. While some newer
products like CRM and supply-chain software will likely continue to
sell well, products like financial software, which is primarily being
sold to replace existing systems, could suffer, Ekoniak said.
In a soft economy, companies are more likely to just hold on to
existing software until economic conditions improve, he said.
Never a true horseman
The one thing Oracle may have in its favor and which distinguishes
it from the other Internet horsemen, Brousseau said, is that it may
not have ever really been a true Internet horseman.
Even though Oracle got wrapped in with EMC, Cisco and Sun, it
never posted the kind of 50 percent growth rates that the others did,
he said. Oracle has about a 20 percent growth rate.
"[Oracle] wrapped themselves in that aura, which helped them on
the way up and is hurting them on the way down," Brousseau said.
"But in reality, they were never growing at the rate the others were." |
