Oracle Under Wide-Angle Lens
Bill Snyder
09/22/05 - 07:11 AM EDT
There's been so much discussion on Wall Street about
Oracle's(ORCL Quote) organic growth you'd be pardoned for thinking CEO Larry Ellison was a Northern California farmer.
With 10 acquisitions, including nine this year, the company is indulging in a spending binge that could cost it as much as $17 billion if all deals close. And that makes it increasingly important -- as well as increasingly difficult -- to gauge Oracle's internal growth rate.
"Adding another layer to the company isn't the issue," says Pat Becker Jr., an analyst with Becker Capital Management. "I'm looking at the core business -- applications and database -- and asking how much is it growing."
Indeed, Oracle added two new companies to the layer in the past two weeks,
Siebel Systems(SEBL Quote), in a cash and stock transaction expected to close in early 2006 and valued at $5.85 billion, and privately held G-Log, which makes software used in transportation and logistics.
Becker will get only a part of his question answered when Oracle reports first-quarter earnings after the closing bell Thursday. The company's core database business is fairly straightforward, but contributions by PeopleSoft, Retek and other recent acquisitions to the applications side are much harder to track.
"It is difficult," agrees Charles Phillips, Oracle's co-president and acquisition point man. "There's no longer a PeopleSoft sales force, or a Retek sales force. We're not breaking out those numbers," he said during an interview.
Robert Stimson, who follows enterprise software for WR Hambrecht, says the company's top-line growth was 9% in the pre-PeopleSoft days of 2004, but it likely slowed to 8.3% (backing out his estimates of PeopleSoft and Retek revenue) in 2005, and it will slow to 5.6% in 2006, excluding both of those acquired companies, as well as Siebel Systems. Hambrecht does not have an investment banking relationship with Oracle.
Oracle expects to grow its bottom line by 20% each year for the next five years. The company is on track to meet that target via a combination of organic growth of roughly 15% and acquisition-driven growth of 5%, says Phillips, adding that the goal is essentially an average, which may vary from time to time.
However, the company hasn't publicly discussed a target for organic revenue growth, he said. Oracle executives say that the Siebel acquisition will add 2 cents to 3 cents a share, excluding costs, to the company's bottom line in fiscal 2007.
Since the PeopleSoft deal closed in late December 2004, Oracle would soon be facing a tough comparison, but as Stimson and others analysts point out, the acquisition of Siebel will postpone that day of reckoning for at least a year. "Lacking any significant organic growth, we believe the company will need to rely more on further acquisitions to sustain its level of growth," he said in a note to clients.
That being said, sentiment on Wall Street appears to favor a solid quarter, despite any misgivings about the acquisition.
"An upside for the quarter is possible, though I'm not predicting it. I'd be disappointed if Oracle doesn't do better than in-line," said Loomis & Sayles analyst Tony Ursillo, whose company has a position in the stock. And that means exceeding the First Call consensus of a 14-cents-a-share profit on revenue of $2.94 billion. Wall Street's informal estimates for database and application license revenue are $531 million and $153 million, respectively.
Alan Lowenstein, senior vice president of American Fund Advisers, says he'd be satisfied with meeting estimates, though guidance for the November quarter and the rest of the fiscal year is, of course, key. Lowenstein, whose company holds a position in Oracle, is generally positive on the stock, saying that "at [a share price of ] $13 or $13.50, most of the negatives are priced in."
Oracle's shares lost 11 cents Wednesday to close at $13.29.
Following last quarter's earnings call, Oracle raised pro forma EPS guidance for 2006 to 78 cents to 81 cents. Analyst Charles Di Bona of Sanford Bernstein said he believes management will "at least reaffirm" guidance on Thursday's earnings call. Bernstein does not have an investment banking relationship with Oracle.
A larger question, though, is what might be a catalyst for the stock. Like
Microsoft(MSFT Quote), Oracle has traded in a narrow range for years. In fact, with a few brief excursions into higher and lower territories, it has traded between $12 and $14 a share for the last two years.
Whether Oracle's acquisition strategy will ultimately translate into more shareholder value is debatable. Analysts note that
Computer Associates(CA Quote), which devoured software company after software company in the mid-1990s,
traded at a lower multiple than its peers, and at a smaller premium to the
S&P 500. The same phenomena may well affect Oracle.
For now, Oracle will probably downshift from acquisition mode to the digestion phase.
Speaking to thousands of customers, partners and employees at his company's annual convention in San Francisco, Ellison on Wednesday said again that for now, his company has no other major acquisitions in mind. Of course, he's said that after other acquisitions, and analysts still continue to speculate that
BEA Systems(BEAS Quote), which supplies a popular piece of software called an application server, still could be on his list.
It's worth noting, however, that Ellison mentioned security and business intelligence on his list of Oracle's top priorities for the next two years. Even if Oracle has no acquisitions in mind in those sectors, a beefed-up presence by such a large player could be significant.
If anyone needed it, Oracle OpenWorld this week was another sign of the company's expanding footprint. It attracted some 35,000 people, up from 22,000 a year ago, a crowd big enough to nearly fill nearby SBC Park. And Ellison himself sounded less like the rebel entrepreneur of yesterday than an industry statesman as he preached "open standards" and industry cooperation to make the software of rival companies much more compatible.
