One Analyst, at Least, Wasn't Blind to Oracle's Weaknesses

SAN FRANCISCO -- Analysts on the Institutional Investor All-America Research Team had better watch their backs. Twenty-nine-year-old Wendell Laidley at Credit Suisse First Boston is nipping at their heels, trying to get to the top of the list.

Canadian-born Laidley, an enterprise infrastructure software analyst, is beginning to attract notice after two weeks ago gaining prominence as the only analyst to predict a revenue shortfall at Oracle (ORCL).

That was a bold call to make, considering that Oracle was on a roll. The company had finally convinced investors that its problems in Asia were under control, and it promised to deliver an array of Internet-based products. In a presentation on Nov. 10, Oracle dazzled analysts with its new Internet strategy and kept up the momentum a month later when it reported blowout second-quarter numbers in December. From November until February, the stock nearly doubled to a record high of just over 41, postsplit. (Oracle split its stock 3-for-2 in February.)

Even Laidley, who picked up coverage during the summer when the stock was trading around 16, was bullish on the stock during the ride. But he knew just when to get off.

For the past six months, Laidley has been ahead of the game. For example, he predicted that Citrix Systems (CTXS) would benefit from the planned Microsoft (MSFT) pricing changes nearly three months before Microsoft announced the move.

For the second quarter, Wall Street expected Oracle's applications license revenue to grow 20% from the same quarter a year before. With Oracle's database revenue not showing stellar growth, all eyes were turned to applications software revenue.

As the quarter came to a close, routine checks with customers, sales people and other assorted industry contacts persuaded Laidley that Oracle's revenue growth was not as solid as the company had suggested. Although about a quarter of Oracle's total revenue is from the applications business, with databases providing the rest, Oracle's stock was already fully valued for a best-case scenario. So any signs of weakness -- no matter how small -- would mean big trouble.

"Verbally, we told our sales force before the close on Monday [March 8] that we were feeling more nervous," Laidley says. An official research note to clients followed on Tuesday morning, in which Laidley told investors to temper their enthusiasm because applications license revenue could be light. With Oracle reporting at the close of market on Thursday, March 11, investors had three days to cut back their holdings.

Major Wall Street analysts stood firm behind their rosy predictions.

Morgan Stanley Dean Witter's Chuck Phillips, ranked Institutional Investor's top enterprise software analyst in 1998, had last issued a report on Oracle in January, when he raised his price target to 39 postsplit. Another Institutional Investor star, Merrill Lynch's Chris Shilakes, issued a positive report the day before Oracle's earnings and noted that "Oracle could move to new highs on strong 3Q earnings."

Uh-oh. When Oracle finally reported earnings after the close on Thursday, investors dived for cover. The company badly missed year-over-year growth projections in both its applications and database businesses. The stock fell more than 20% the next day in heavy volume.

After Oracle's disappointing earnings, Phillips left his rating at outperform, though he admitted that the third quarter showed "squishy top-line" growth. Shilakes, who was positive on the stock just two days before, immediately cut his intermediate rating to accumulate "to reflect execution concerns and near-term volatility as investors take profits."

Laidley, who has been with CSFB since 1998, didn't make it to the Institutional Investor ranks last year, but at least this year he knows that he's saved his clients a bundle of money. That at least should help him get a few more votes in II's All-America Research Team analyst ranking.

A Few Facts About ... Wendell Laidley Director of enterprise infrastructure software Credit Suisse First Boston Age: 29 Education: B.A. in economics from Hobart College Postgraduate study in Japanese at Cornell University Year in Japan on Princeton University's Asian Fellowship Hometown: Edmonton, Alberta Resume: Deutsche Bank Securities, 1997-98 Wessels, Arnold & Henderson, 1996-97 Volpe Welty, 1994-96 R.R. Donnelley, 1993-94 You might notice: His size 14 feet Enjoys: Basketball, rollerblade hockey and mountain biking Early ambition: Competitive ski racer How he got into the business: The old-fashioned way -- by accident

Photo credit: Credit Suisse First Boston

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