Oracle Hits a Sour Note

Oracle Corp. posted a profit for its most recent quarter but with the economic outlook even more uncertain after last weeks terrorist attacks in the United States, officials of the huge database and enterprise software developer are not painting a particularly rosy picture of the future.

"We have pretty good data about what people are forecasting and what leads were getting," said CEO Larry Ellison in a conference call with press and analysts this week. "And we dont think things are recovering."

Oracle, of Redwood Shores, Calif., reported income of $511 million on revenue of $2.24 billion in the first quarter of its 2002 fiscal year, which ended Aug. 31. That was a slight increase in income and a slight decrease in revenue from the same quarter last year. Operating margins increased to 33 percent this year from 29 percent last year.

However, on top of a murky economic outlook for at least the first half of 2002 and the real possibility of war, Oracle has some additional challenges to face.

The company reported database sales down 8 percent for the quarter, and applications sales down 6 percent. While guidance for the following quarters is difficult, Oracle executives suggested the situation could get worse.

Making a forecast "is very difficult," said Chief Financial Officer Jeff Henley, on the call. "No one can predict what the effect of last week is going to have on the economy. We could predict that if you had to put a number on it, we would say 15 percent negative earnings. We still believe earnings could be flat."

Oracle must confront a handful of challenges in the coming months, according to industry experts.

"They face a very difficult global economy, and it even gets more difficult as it gets harder to fly and there very literally could be war," said Eric Upin, an analyst with Robertson Stephens Inc., in San Francisco. "There are also software-specific problems and adoption has slowed."

After six to eight years of explosive software development that required companies to deploy new software and kept Oracles software and consulting revenues humming, the company is now in a product lull, according to Upin.

Oracle also faces challenges across each of its three business units-databases, enterprise applications and application servers. While the company is the clear market leader in databases for now, IBM and Microsoft Corp. are nipping on its heels with database offerings and determined to take market share.

Oracles application business is declining, and despite Ellisons claim that the Oracle11i e-Business suite customer reference list has finally grown, the company hasnt shown any real evidence that it can grow and maintain market share, analysts said. Likewise, Oracles application server business is too young to make any significant headway, they asserted.

Finally, the company has seen a fair number of management departures that could cause some headaches.

"Clearly the question is, When do you … embrace [Oracle] stock?" said Upin. "Our answer is, Not yet. Its well-positioned, but there is a lot of risk."

Oracle stock on Wednesday closed at $11.20 a share, down 18 cents, in a down market.