Ellison on Oracle's Future

Near the close of his keynote speech at Oracle's biggest conference of the year, the ever-colorful CEO Larry Ellison reminisced about the software company's "stressful" early days. Ellison said he'd work until 1 a.m., "come home, open up a can of pea soup, turn on CNN Headline News to see what was going on in the world, have my soup, and go to bed."

About a quarter-century later, Ellison is worth $21.5 billion, and Oracle (ORCL) is one of the world's largest technology companies. And while his diet has no doubt improved, the company still faces pressures any CEO would find stressful. In particular, customers and investors showed up at Oracle's annual OpenWorld conference in San Francisco with questions about a critical product launch due next year and the threat of a deepening slump in corporate tech spending.
Aiming at VMware

During the Nov. 14 speech, Ellison tried to put those anxieties to rest, pledging to deliver a key piece of the ambitious new product a half-year early—in the first part of 2008. He also took one of his trademark shots at an emerging rival. Oracle is nearing the home stretch of a period when, according to analysts, the company shrugged off an economic malaise that's causing customers to curtail IT purchases and prompting investors to unload tech stocks.

The accelerated product timetable is for Fusion, a project that aims to knit together the best parts of Oracle's homegrown software and the array of products amassed through its acquisitions of PeopleSoft, Siebel Systems, and dozens of other companies. Until now, Oracle had maintained the suite would arrive by late 2008 despite market speculation the complex launch might slip into 2009. But on Nov. 14, Ellison said a key element will arrive during the first half of 2008, though he conceded that customers will move to Fusion products over a "long transition period." With Fusion, Oracle is trying to close ground on archrival SAP (SAP) in the market for the software companies use to plan budgets, manage payrolls, and track customers.

Ellison is stalking new quarry as well. On Nov. 12, Oracle introduced a virtualization software product, dubbed Oracle VM. The new software will help companies make more efficient use of their servers—much like the software from industry highflier VMware (VMW). "It's a direct assault on VMware," says Brian Stevens, vice-president of engineering at Linux vendor Red Hat (RHT). Said Ellison: "Some companies say, 'We're the only ones that can do that.' …Not any more." VMware shares declined in the wake of Oracle's announcement.

A buy?

After giving his sales spiel at the convention hall, Ellison headed a few blocks uptown to address analysts at a swank hotel. Wall Street is on the lookout for any indication that a pullback in U.S. companies' technology spending (BusinessWeek.com, 10/15/07) will effect Oracle's fiscal second quarter, which ends Nov. 30. So far, that appears unlikely. Oracle's tight rein on expenses and strength in the flush energy sector could immunize it from the ills that have afflicted companies more closely tied to the beleaguered financial and automotive industries. Oracle also benefits from the quarterly maintenance fees customers pay to keep their software up to snuff. During the meeting, Chief Financial Officer Safra Catz said Oracle is poised to increase revenues faster than the 20% a year Ellison promised investors three years ago. Contract sizes are also getting larger, she said.

Some tech titans aren't faring as well. Tech stocks took a dive after Cisco Systems (CSCO) CEO John Chambers said Nov. 7 that soft IT spending—particularly in banking—would likely slow the company's growth (BusinessWeek.com, 11/8/07). Made during a conference call with investors after Cisco's fiscal first-quarter earnings announcement, Chambers' comments triggered a sell-off in shares of tech companies, including Oracle, Apple (AAPL), IBM (IBM), Intel (INTC), and Dell (DELL).

But analysts expect Oracle to meet its second-quarter targets, and some are telling clients to buy the stock. Peter Kuper, a vice-president and research analyst at Morgan Stanley (MS), expects Oracle to meet, though not exceed, its forecast that new software license bookings will grow by 15% to 25% during the second quarter, and that earnings per share will come in at 20¢ or 21¢, up from 18¢ a year ago. That could be good enough for investors who have already built the risk of lower-than-expected earnings into Oracle's stock price.
Keeping it together

"If they put up a decent quarter, the stock's going to snap back very nicely," says Kuper. "As an investor, your downside is very low." Oracle shares tumbled about 15% in the days following Chambers' comments; the shares hadn't lost more than 13% during a two-month period during the past five years, according to Kuper's analysis. Shares of Oracle closed Nov. 14 down 34¢, or 1.7%, at $20.18. The shares pulled back 20% compared with their 52-week high of $23 on Oct. 11. Oracle's stock could recover, to $24, if the company meets second-quarter expectations, Kuper says. "If you bought at $19, you've just made yourself a very nice 25% return" if the stock returns to its levels before the November tech sell-off.

Other analysts moved Nov. 14 to upgrade Oracle's stock. Analysts at CIBC World Markets and Broadpoint Capital (BPSG) said the company is equipped to ride out a possible downturn in technology spending due to its recurring revenue streams from software maintenance. They cited lower stock prices as a potential benefit for Oracle, since cheaper shares could mean cheaper acquisition targets for the software giant. Oracle has acquired 41 companies, for more than $24 billion, since the beginning of 2005.

Oracle's prospects for future growth may hinge on whether it can keep its largest customers in the fold as it launches the Fusion project. Analysts and customers have questioned how robust the first version of Fusion software will be (BusinessWeek.com, 11/5/07) and whether compelling Fusion products will be delivered on time.

Ellison's remarks on Nov. 14 may quell those concerns, making life for Oracle investors a lot less stressful, at least for now.

Author: Aaron Ricadela @ businessweek.com