Deal Them Out: Delayed Sales Spark an Oracle Warning

Updated from 5:24 p.m. EST:

Attention Oracle(ORCL Quote) shareholders: You've just been back-ended.

After saying for months that its business wasn't feeling the impact of an economic slowdown, Oracle said Thursday that revenue and earnings would fall short of consensus estimates for its just-ended fiscal third quarter. The culprit? Last-minute deals falling through because of the economy, stupid.

"As late as last Friday, we still felt good about the quarter," said Jeff Henley, Oracle's chief financial officer, on a conference call with financial analysts after the markets closed Thursday. "Then on Monday, we saw a few cracks, then some of the cracks got wider, and on Wednesday, a significant amount of deals got deferred."

The cracks got wide enough, in fact, for nearly a quarter of a billion dollars to fall through them. That's the gap between what Oracle will report in revenue for its third quarter and the high end of what Wall Street had expected.

The last days of a quarter are critical for Oracle's sales, which are notoriously back-end loaded. In other words, Oracle, like many enterprise software companies, completes a large portion of its sales in the closing days of its financial period.

Larry Ellison, the company's notoriously outspoken CEO, said he personally got involved in failed efforts to close the several deals that would have made the difference between Oracle meeting or missing investors' expectations.

"A lot of these deals were already approved at the mid-high level, and once it got up to the CEO or CFO level, they were pushed off," Ellison said. "I think we have a lot of nervous executives looking at this economy."

Oracle's announcement Thursday of estimated results came one day after it closed the books on its quarter. The company reported preliminary third-quarter earnings of 10 cents a share, a penny ahead of the year-ago figure and 2 cents shy of the analyst consensus quoted by First Call/Thomson Financial. The company also signaled that its profit and revenue growth for coming quarters will be less than it previously expected, though it declined to give detailed projections. Before Thursday's preannouncement, the consensus fiscal fourth-quarter earnings estimate was 20 cents per share, or 25% over the year-earlier period.

Overall revenue rose 9%. Software license revenue, closely watched because it is Oracle's mainstay and highest-margin product, grew by 6%. That puts Oracle's third-quarter revenue at around $2.67 billion, some $200 million short of the First Call consensus. The company plans to report official results March 15.

Oracle shares were halted ahead of Thursday's news, but when the shares were unleashed again, they ran and hid under the porch. After closing up more than 12% at $21.38 during regular trading, the stock fell 20% to $17.03 on Island ECN. Before Thursday's news, Oracle's shares were down 26% since the beginning of the year.

The maker of enterprise software put its closely followed applications revenue growth figure at 50% for the third quarter, well below the 75% Oracle was guiding toward on Feb. 13. Oracle has aimed to boost applications revenue by 50% to 100% in fiscal 2001. Database revenue growth will be flat to slightly negative, the company said. Oracle forecast a 15% to 20% rise in that figure only two weeks ago.

Company executives were bullish in their estimates up and down Wall Street in the days leading up to the warning. Not only did Oracle executives give bullish presentations at investment conferences two weeks ago, the company sharpened its horns at its AppsWorld users' conference last week in New Orleans.

"I had dinner with Jeff Henley at the New Orleans event," said Jim Pickrel, an analyst at J.P. Morgan H&Q, who had a buy rating on the stock as of Thursday evening. "Any chance he had to introduce a hedge clause into the conversation, he [didn't take]. Things change fast, and I'm certainly not ruling out the scenario as they laid it out, but that still creates surprise." (J.P. Morgan H&Q hasn't done underwriting for Oracle.)

There will likely be a lot of sore ears on Wall Street Friday as investors demand to know how company officials could have so thoroughly failed to detect imminent problems. Henley, Oracle's CFO for a decade, sounded a mea culpa in an interview with TheStreet.com.

"We were being as honest as we could be," Henley said about Oracle's comments. "In hindsight, maybe we should have been more conservative. But up until the last day, we still thought we were going to make the numbers. We knew it was a risk, we knew the economy was declining, and we were talking to clients and they were saying they were going to sign. So, we were surprised, and I'm sure our investors were surprised, too."

Analysts did say that Oracle's story was at least conceivable.

"This last-minute fall-off is not just being reported by them, so that gives it a measure of plausibility," Pickrel said. "But you always have to wonder, Were there really that many deals that were coming down to the wire?"

You've also got to wonder what this means for other software companies that have been bullish in the face of tough times. Because Oracle's product line is so broad and addresses so many different areas of software, analysts say it's inevitable that other companies will also feel some pain.

Prominent enterprise software makers that haven't yet disappointed Wall Street include Siebel Systems(SEBL Quote), PeopleSoft (PSFT Quote) and BEA Systems(BEAS Quote).

"I would think that many other software companies out there are now going to have to go out and scrub their pipelines as well," said Jon Ekoniak, an analyst with U.S. Bancorp Piper Jaffray, who had a buy rating on Oracle Thursday night. "It will be interesting to see how other companies are impacted." (His firm hasn't done underwriting for the company.)

Even as his minions were talking up the company's prospects, CEO Ellison was having a yard sale for his Oracle shares. Ellison sold more than 29 million Oracle shares, for approximately $895 million, during January alone, according to Web site InsiderScores.com. Company officials said Ellison had to sell those shares because they were part of an options grant that was due to expire.

"Millions sound like a lot, but relative to what he owns, it's really not that significant," Henley said. Ellison still holds 1.3 billion shares, or 23% of Oracle's total.