Software Hopes Not to Catch Oracle's Cold

CEO Larry Ellison's comments at Comdex seem to affect only Oracle's stock for now.
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Just when you thought it was safe to go back into software, Larry does it again.


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CEO Larry Ellison warned late Monday that the database giant's earnings would come in 1 to 2 cents light, according to news services, at 9 cents to 10 cents per share instead of the 11 cents analysts were expecting. Ellison cited the weak economy and slow business environment.

Then today, CFO Jeff Henley told investors at an investment conference in Baltimore that total license revenue -- the firm's software sales -- would be down 20% or more year over year for the quarter that concludes at the end of November, according to Dow Jones.

That's worse than the 15% year-over-year revenue decline the company had previously forecast for the same period, its fiscal second quarter. For the same period last year, Oracle had $1.1 billion in license revenue.

The profit and revenue warning set off a flurry of downgrades and concerned notes from Wall Street brokerages. Just like last quarter's warning, this announcement was made outside the usual conference call venue. Reaction was split over whether it signaled continuing weakness for enterprise software in general or for Oracle in particular.

Credit Suisse First Boston analyst Wendell Laidley cut the stock to hold from buy after Ellison dropped the bomb Monday night, citing the shares' high multiples. Since its most recent closing low of $10.76 on Sept. 21, Oracle shares had rallied 43% in the I-just-can't-get-left-behind surge that has consumed tech stocks lately. In late-day trading Tuesday, the shares were off 54 cents, or 3.5%, to $14.86.

"We would expect the shares to trade off today given rich valuation -- 8.6 times calendar year 2002 total revenue (the richest multiple among

application vendors) and 35 times our calendar 2002 earnings per share estimate of $0.44, vs. $0.43 for calendar year 2001," Laidley wrote in his report. His firm hasn't done underwriting for Oracle.

The warning inspired other notes from perplexed analysts, who were starting to believe what they have been hearing from software companies: that things were a little better and that customers were staring to return phone calls again. Now, with Oracle's warning, there's a question if things have really come back in any meaningful way.

"The timing of these comments

is surprising given that Oracle has two weeks left in its quarter," wrote Merrill Lynch analyst Chris Shilakes, who has an accumulate rating on Oracle. Usually, Oracle brings in the largest chunk of its revenue during the closing weeks of its quarter, so warning now shows that it doesn't have much confidence during its busiest time. "It appears that the company has a good view that business is not coming in as expected in the quarter." His firm has done underwriting for Oracle.

The company has made a habit of massaging expectations downward in recent quarters, though, and actually beat lowered estimates during its

last quarterly report.

But investors at large seemed to view the warning as an Oracle-specific event. While the firm's own stock traded off on the news, shares of competitors


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BEA Systems

, which is scheduled to report earnings this afternoon, were all higher.

That may be due to concern that Oracle isn't just suffering from the slow economy, but from competitive pressure as well. UBS Warburg analyst Ken Cary, who rates Oracle a hold, wrote that Oracle has been feeling the heat in its core database business, and alienating other software partners by selling similar products to run on top of that database.

"We continue to believe Oracle is experiencing competitive pressure from IBM at the top and Microsoft at the bottom in the database market," wrote Cary. "We also believe the independent software vendors (ISVs) are promoting IBM over Oracle because Oracle is competing with the ISVs with

Oracle's} eBusiness Suite." His firm hasn't done underwriting for Oracle.