2002 Preview: When Will Things Look Up for Oracle?

Some hard times may still be ahead for software.

Most software firms had to work harder to sell less during 2001, and this year could prove to be maddeningly similar, even if a general recovery is in the cards. The reason? Some analysts wonder how quickly software customers, weary from the ongoing recession, will want to spend money on new technology if their own businesses are just starting to improve.

In other words, if a general recovery does come in the first half of 2002, technology names might take a little longer to reap the benefits until, say, the second half of the year.

Here we take a look at three leading software companies and their prospects in 2002.

A Tenacious Mister Softee

Fresh off its legal victory (sort of) over the Justice Department, Microsoft (MSFT Quote) has a lot going for it this year. With the new version of its Windows operating system, dubbed XP, and its entry into console-game marketing, the Xbox machine, this company has much to offer.

Now, it's no secret that the Redmond, Wash.-based monopolist has a history of making money, even in tough times. Go figure: In a year when scores of tech stocks were in the toilet, Microsoft shares gained some 70%.

Through its tenacity and massive war chest ($36 billion in cash at the end of September), Microsoft got a sweet settlement for its antitrust travails. The legal saga is still evolving and subject to approval, but early odds are that it's closer to the end than to the beginning.

Microsoft recognizes that growth in the PC industry -- its bread and butter -- has slowed dramatically. In fact, the Xbox's launch is a direct result of that trend, as the company forges ahead into new, higher-growth-opportunity markets. Microsoft is poised to lose more than $100 on each Xbox it sells, but it hopes to make up for that the same way it has always made money: by selling software -- in this case, games -- to run on those machines.

Endgame: Look for Microsoft's stock to hold up or even appreciate in 2002 as the legal story ends and the company's myriad other initiatives take hold. Don't bet the farm, though. Last year's performance will be a tough feat to repeat.

Oracle's Changing Strategy

Poor Larry Ellison. As Oracle's (ORCL Quote) chairman and CEO, he's sometimes the world's second-richest man, but he just can't seem to get the respect he wants. In 2001, Oracle shares fizzled as sales of the company's software applications -- on which it was betting big in 2000 -- floundered. In its most recently completed quarter, new application sales were down 42% from a year earlier.

Suit Yourself With Men's Wearhouse

A Mutual Fund Wish List

Market Pulls Hare, but Economists See a Tortoise Year

Third Time's No Charm

Diagnosing Biotech

A Long Year's Journey Into Night

Ciscos and Lucents Stuck in Low Gear

Three Big Media Dramas to Watch

Perhaps worse than that, though, Oracle has been facing pressure in its core database business from the likes of IBM (IBM Quote) and Microsoft, and its database sales fell 21% last quarter. Oracle denies that it's losing market share, but plenty of analysts say that's just wishful thinking. Its stock, in turn, is down 50% for the year.

With its application sales in the dump and its database market share dominance in question, Oracle has shifted its focus once again. The company says that its application server -- software that connects programs and Web sites to the databases behind them -- will now lead its growth.

Oracle tried to prove that in its most recent quarterly press release, when it said sales of its application server were up 52% from a year ago. But in an interview with TSC, Chief Financial Officer Jeff Henley said application server sales amounted to just $50 million in sales, or just 2.1% of total revenue. On top of that, Oracle faces stiff competition in the application server market from the likes of BEA Systems (BEAS Quote) and -- once again -- IBM.

Yet despite shrinking revenue numbers, Oracle's margins have remained relatively strong, coming in at 35% in the most recent quarter. Ellison predicts the company can reach 50% margins once a recovery arrives. Analysts as well as CFO Henley have been less than eager to back him on that claim. Although Oracle stock is in the doghouse now, it could see some upside if the company successfully executes its plans for the application server market and increases margins in 2002.

Difficult Chapter in PeopleSoft's Story

PeopleSoft(PSFT Quote) is the software stock that won in 2001 -- just by not losing.

With a new product launch at the end of 2000 and an upgrade to its customer relationship management, or CRM, software in the middle of 2001, the company has been able to meet analysts' consensus expectations. Since most firms are lowering guidance, that alone is an amazing accomplishment. Its stock has held its own, too, now roughly in the same spot it was at the beginning of 2001. With the Nasdaq Composite down 20% during the same period, probably more than a few investors appreciate the do-nothing return.

The same might not be true in 2002, though. One of the main story lines in PeopleSoft's tale is that of its CRM software, which it picked up through its acquisition of Vantive in 2000. PeopleSoft unveiled an Internet-ready version of the software last June, which can run remotely using just a Web browser, and it made a big splash, earning good customer reviews.

Now, though, CRM leader Siebel Systems (SEBL Quote) has its own Internet-enabled software up and running, and people in the know think Siebel's business has firmed up in the fourth quarter. The company hasn't announced anything, but analysts are buzzing about at least one large deal during the fourth quarter, as well as an increase in the company's spending on print ads. The thinking goes that if Siebel has money to spend on ads, it must be getting that moolah from somewhere.

With the gee-whiz effect of its own software fading and a rich valuation of 55 times 2002 expected earnings, PeopleSoft may have a harder time holding its head above water in 2002 than it did in 2001.