As the world's second largest software company, Oracle Corp. (Nasdaq: ORCL) always draws a lot of attention when it reports quarterly results. Coming off a strong fourth quarter, the market expected the database and enterprise software vendor to beat analyst estimates again with Tuesday's first quarter report.
It didn't happen, but as Oracle CFO Jeff Henley and other executives note, quarter-to-quarter inconsistency is nothing new with the company. Henley talked to ZDII late Tuesday, following the company's quarterly conference call with analysts. Following are excerpts from the telephone interview:
ZDII: During the conference call, you mentioned that Oracle didn't land as many big contracts as expected during the first quarter. What happened?
Henley: It's really hard to say. You heard some of the speculation, but my experience at Oracle is that every quarter just doesn't happen quite the same. There's a lot of business that we always close in the last few weeks of the quarter, and some quarters -- we had the same thing back in Q3, we didn't close quite as much as normal, and our big deal percentage was a little off the prior, and then in Q4 we kind of bounced back.
So it's really very difficult to say, it's never quite the same. Some quarters we do a little better than average, some quarters we do average, some quarters we do a little below average. This was one of those quarters we did a little below average.
ZDII: Despite that first quarter, you're still seeing a strong pipeline for the rest of the year --
Henley: Absolutely, and that's the point I think we've tried to make, is that one quarter doesn't make a trend. In a lot of high-tech stocks, you know, a bad quarter maybe -- I don't think this was a bad quarter, but a weak quarter or something where we didn't blow out the numbers -- maybe it's sort of like, geez, maybe something's going on and things are going to get bad. But I think we've proven over the years that we have a lot of staying power. We're a little erratic, and you know, you can't just take a little bit of softness and say, wow, that's the start of a new trend.
We absolutely see nothing that suggests that we aren't going to bounce back and have a terrific year.
ZDII: But what specifically gives you reason for your optimism?
Henley: Well, I think, as I said on the call, there's a couple of things.
One, I think, if you just look at market statistics and all the stuff that's being written about e-business, I think it's the real deal. It's been kind of developing and now is kind of in an explosive stage, so there's just a general industry backdrop.
I think Y2K has depressed things a little bit, and now that's kind of waning, so that was kind of a general depressant that's kind of starting to go away and should be easing off now.
Our Business Center is up 50 percent in activity this summer, which I think is a very healthy lead indicator of interest. We have pipeline reports that we always track around the world, deals that we're negotiating on, or working on or whatever, and that pipeline year-over-year growth looks strong. So there's a whole bunch of things that we try to piece together when we do our planning and when we do things, and so we're relying on a lot of those traditional measures. But as we said earlier, we can't precisely predict exactly what the revenue growth will be in any one quarter, and therein lies some of the concerns that people have from time to time.
But I've found at Oracle over the years that if these indicators are good, which they are now, if we have great products, if our products are really leading -- and over the years we've had good products, at times maybe we're a little ahead of the market or whatever -- we're as ahead of the market as we've ever been right now, that's a very positive factor. So the market's good, I think we're in a very strong competitive position in our database and applications business, and that's why we have been bullish for some time, actually the last few quarters, and continue to be very bullish for the year.
ZDII: As you just mentioned, and as Larry Ellison said during the call, Oracle is consistent year-to-year, but not from quarter-to-quarter. Why is it so difficult to keep quarterly earnings smooth?
Henley: Because we sell a lot of large transactions to customers, customers who will buy large amounts to get a big volume discount.
Customers have learned over the years -- they've been trained by Gartner (Group consultants) and other people -- that you want to negotiate at the end of a quarter, so you know there's just more business at the end of a quarter than you would like to have. And sometimes negotiations break down, the customers can't make up their minds, it's just the basis of the way it works.
I think that some investors don't -- to this day I'm amazed -- they don't totally understand it. I think they feel like we can just manipulate the numbers, and you've got the SEC and everybody else out there really coming down hard on companies for managing earnings. And we've always taken the position that you can't manage earnings, so we don't have huge cushions and we don't just manipulate the numbers around to please investors. I mean, I think our results kind of just reflect the reality of the way business gets done. There are these kinds of cycles and we say, you have to kind of look at a few quarters to get a trend, you kind of have to look at a year, and that's generally been the way it's worked over the years.
I think in general, we've had a lot of good years, particularly when we've had good products. And I think for the last year, we have been growingly excited about our products. We're well ahead of the market and our competitors, both in database and applications. The move we made three, four years ago to kind of embrace the Web early put us out several years ahead. And it takes our competitors a long time, we think, to try to catch us, and hopefully they won't catch us.
That should allow us to gain market share, so if the market's good and getting better, and we can gain share, historically that's generally worked well for us.
ZDII: Oracle for years has basically been saying what you just said. Why do you think investors "don't totally understand it"?
Henley: There's daytraders, there's momentum players, there's just a lot of people that like to speculate and try to guess what this quarter's going to be. And so we've had an enormous run up. Since the first of September the stock went up over 10 bucks. I don't know what caused all that, but I think that there is some speculation and stuff like that. And when some of that burns off, I guess people are disappointed.
I can't control the market. Nobody can. We've got a very frothy market the last few years, and I'm not going to say it's bad, but I just think some of it is people kind of getting carried away with this stuff, I guess. And there's a little bit of this speculation, which I don't think is really long term thinking, I think there's a little bit of bubble that goes in here in these quarters where people want to try to guess what's going to happen. We've had quarters where it's gone the other way. I remember a few years ago, people would beat the stock up and then it would go roaring back after the close.
I try not to let it upset myself too much. What we really try to do is make sure we're going to deliver a good year. We try to tell people as best we know what we really think about the company and where the outlook offers things. We've tried to just keep educating people and executing. Hopefully people will learn over time, at least about Oracle, that it doesn't make a lot of sense to speculate too much on any one quarter.
ZDII: On the call, Oracle executives repeated what they've said before about saving $1 billion a year by becoming a more Internet-centric company over the next 18 months. What moves do you have planned, and how far along are you in implementing them?
Henley: Well, there's a lot of moves. We've actually been working on globalizing the company for several years, but (CEO) Larry (Ellison) has expanded the scope of the project and he's kind of trying to accelerate everything. So I would say the lion's, the vast lion's share of that $1 billion, is still to be had.
So we're making good progress, but -- the synergy gains momentum. As you pierce together all of your ERP systems around the world into one, as you piece together all of your support systems into one, as you piece all of your sales systems together, you actually -- it's not linear gains, it's actually a big momentum gain you get as you really eliminate a lot of duplicate people, redundancies, as you leverage information. It's kind of a -- we'll see good, steady progress, but it's kind of an accelerating trend that we'll see.
ZDII: But some of the things Larry mentioned on the call -- consolidating servers and marketing groups, for example -- sound like good old-fashioned cost-cutting rather than anything related to the Internet specifically.
Henley: You're partially right, I mean, there's no question, it's always generally efficient if you can consolidate things. I think the difference with what Larry's saying is that historically people couldn't or didn't consolidate global IT.
I mean, it was very difficult to consolidate a database. Database technology wasn't robust enough. So we've only recently entered into periods where the database is now large enough to handle big companies to be able to let them run a real, true, huge global operation. Telecom costs are a lot cheaper. So all of that has happened.
But the other thing about the Internet is, is that if you want to let people access information globally to buy or to get service information or vendors to come in and update catalogs so we can buy stuff from them globally, you have to have central information. So part of that consolidation thing is cost and efficiency which wasn't technically very doable until recently.
But part of it is, you need to have central information to run an Internet business. And I think that's the point that maybe didn't come across well enough. You need centralization to run an Internet business. Having islands of information all over is inefficient from a cost (viewpoint), but it's also inefficient to run in an Internet world.
We use the case of Amazon. People around the world can buy off Amazon.
And so we're centralizing to save a lot of money, but also to centralize information to run a global Internet business with our customers, with our suppliers.
ZDII: Let's talk about your competitors. During the call, you mentioned that you've seen IBM becoming more aggressive in the database business. How much heat are you feeling from IBM and Microsoft in the database area?
Henley: I'd say that over the last, say, 18 months -- they're both excellent competitors -- we feel a little less heat from Microsoft, because they've had slippages in products, the scalability issues, I think, they have are more of a problem as people move to the Web. And then IBM has actually benefited a little bit from the Internet, like we have, and so IBM has gotten kind of a second wind out there to kind of extend their mainframe business and stuff like that. And they've gotten very aggressive in their advertising and so forth, so, you know, I'd say IBM, we see a little bit more, we see Microsoft a little less. But they're both good competitors.
Again, in the mainline Unix world, we still own that business, we're gaining share nicely against any of them. In the NT world, we're still gaining share on Microsoft. We've never really been a big player in mainframes.
I don't want to overdramatize IBM, I mean, they've been out there for years. It's just that with the Internet, they're able to actually go out and advertise and create a little more of a presence and be viewed as a little newer player now, because of their centralization and people being able to extend some of their mainframe stuff.
ZDII: The other field I'm wondering about is CRM (customer relationship management) software. Oracle continues to see a rapid growth there, and yet if you talk to Siebel or Vantive or someone like that, they keep saying they don't see Oracle in their contract competitions. Why do you think that is?
Henley: Well, I think, first of all, there's a lot of truth to it. I think the other thing is that they really frankly don't want to acknowledge us. I think that they're a little bit in denial.
But I think that the reality is that we are new to CRM, it's a big market, there's a lot of growth, and I think that there's a lot of growth that we'll all get for awhile. So in a new market, there's a number of people who do well. We saw that in our database business years ago, a lot of our competitors, like us, grew nicely. I think that's the truth of it: we're not competing that heavily with lots of people.
As the market starts to mature, as we all get bigger, then I think you'll see a lot more competition. But we are definitely starting to engage in certain areas against these various guys, and they'll deny this for awhile. But if we keep posting triple digit growth every quarter, eventually I suspect they'll sing a little different tune. QAFOLKS>