This Time It Won't Be a Surprise if Oracle Warns

Sometimes, stocks get cheap for a reason. Right now, Oracle(ORCL Quote) looks pretty cheap.

But the second-largest software company is also a prime candidate for missing its numbers for its fourth quarter, which ends May 31. Granted, the company still has three weeks to make those numbers, and it is notorious for closing deals at the last minute.

But few people on Wall Street are lining up to bet the company will pull it off. Maybe they're gun shy from the company's sudden warning last quarter, after its executives had been bullish on the firm's prospects. Adding to the nervousness are reports of widespread discounting on software by the firm. Then again, maybe they've just come to accept that the technology spending slowdown is bigger than any one company, even one the size of Oracle.

"The question I'm getting is not even if they're going to miss, but how badly," says Melissa Eisenstat, an analyst with CIBC World Markets who rates Oracle a hold. "It's not going to be a good quarter." (Her firm hasn't done underwriting for the firm.)

Which, again, is why the stock is cheap.

At Wednesday's closing price of $17.06 after rising 2 cents for the day, Oracle shares trade at 32 times fiscal 2002 earnings. While that might not be in the low-to-midteen level that value investors like to see in a stock, it's cheaper than companies like Siebel Systems(SEBL Quote) (68 times), i2 Technologies(ITWO Quote) (244 times) and PeopleSoft(PSFT Quote) (57 times).

"From a stock perspective, I think a lot of bad news is already baked in," says George Godfrey, an analyst at ABN Amro who has an add rating on the stock. "I don't see a lot of downside in Oracle shares from here." (His firm hasn't done any underwriting for the company.)

An Oracle executive wasn't immediately available for comment for this story.

Now, not all of Oracle's woes can be laid at the company's feet. As with any good disaster, a lot of things have gone wrong at exactly the right time. Not the least of these is the fact that the brunt of the technology-spending slowdown has come during Oracle's most critical quarter, when it typically brings in a third of its annual revenue.

The company is clearly struggling to deal with those challenges. Reports of discounting and price slashing to close deals at the company are rampant right now on Wall Street. Chatter about discounting at the company started cropping up in the second half of April, well before the company's crunch time during the quarter.

George Roberts, Oracle's sales chief, said last week that it's not offering discounts to customers. That, of course, is the company line, straight from the mouth of CEO Larry Ellison. He contends that his company's software has one price that every customer pays, which is listed on its Web site.

Analysts scoff at the thought.

"That was just hubris," says CIBC's Eisenstat. "This whole thing of are they discounting or not is ridiculous. Of course they will. Companies don't start discounting until they have to."

In fact, on Wednesday, Oracle issued a press release touting a 33% "discount" that it's currently offering on its Enterprise Resource Manager software, which helps administrators run and maintain Oracle databases. A company spokeswoman said the use of the word "discount" in the release was an unfortunate choice, and characterized the offer as a promotion instead. Still, it doesn't do anything to bolster the company's claims that it's not lowering prices to get product out the door.

"Any time you speak in absolutes, you set yourself up for a fall," says CIBC's Eisenstat. "If they say we don't discount and then they come out with a press release saying 'We're discounting!' they lose credibility."

Aside from the economy, Oracle has been struggling with its push into software applications, the sophisticated business software that is all the rage in corporate America right now. While analysts were looking for 50% growth or more from the company's applications last quarter, Oracle could muster only 25%.

"The transition has definitely been harder than they thought it would be. They've got issues with the applications business that they're not facing up to, at least not publicly," Eisenstat says. "They are, always have been and always will be a database company." Database revenue still accounts for more than two-thirds of Oracle's business.

Beyond Oracle, though, the company's fourth-quarter results will almost certainly have an effect on the rest of the software sector, just as they did during its third quarter. In that regard there may be a silver lining in Oracle's bad news, should it come.

"It certainly depends on the magnitude of the disappointment and then how much investors believe in what the company has to say," says ABN Amro's Godfrey. "But I'm sure Oracle's comments about the future will be more upbeat than the fourth-quarter results show. If they're more believable and their comments point to things getting better, most software companies are already pricing in a pretty benign outlook. So I think the impact will be less this time than at the end of February."

At least there's one positive to look for in what most are saying will be a dreary quarter at Oracle.