Oracle’s Power of Prophecy Fades; corporate customers are struggling to organize data that aren’t so easily structured but Oracle databases are suited best to information that is easily categorized in rows and columns

June 25, 2013 Leave a comment

June 24, 2013, 5:33 p.m. ET

Oracle’s Power of Prophecy Fades

By ROLFE WINKLER

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Larry Ellison says his products aren’t the problem. Except that they are. What’s worse for investors, Oracle may be making imprudent investments as a result.

Explaining why his company missed its own fiscal fourth-quarter targets, Oracle’s chief executive pointed to “weakness” across each of the company’s core offerings. “So it was clearly an economic issue,” he said, “not a product competitive issue.”That isn’t clear. Just as likely, the broad-based slowdown reflects innovative rivals starting to eat Oracle’s lunch.

“Cloud” companies like Workday andSalesforce.com, for instance, offer software delivered over the Internet that is more modern, easier-to-use and cheaper to install than the legacy products that still underpin a sizable portion of Oracle’s own business. Late to the party, it is retrofitting its own products while buying other, small cloud companies.

Meanwhile, Oracle’s database offering isn’t the best option to handle new kinds of data that are flooding corporate servers. Its databases are suited best to information that is easily categorized in rows and columns. But corporate customers are struggling to organize data that aren’t so easily structured. Here, open-source software coupled with commodity hardware looks like a better answer, not least because it is significantly cheaper.

The higher cost of its products means another of Oracle’s assets, its hard-charging salesforce, may in some instances become a liability. When customers didn’t have good alternatives to Oracle’s products, it was easier to squeeze them. But a history of doing so can ultimately push them to take up new, rival products.

Oracle is actually investing more in sales, not just for newer cloud offerings but for legacy products as well. A lack of salesmen is unlikely to be the reason for flagging growth in Oracle’s legacy products. So adding to them in that business could represent doubling down on a bad hand.

Oracle isn’t in a fundamentally worse position than its big tech peers, which face growth headwinds of their own. Oracle’s revenue in its most recent quarter were flat compared with a year earlier. But that actually stood out against revenue atInternational Business Machines, down 5%, and at Hewlett-Packard, down 10%.

Indeed, considering that IBM earnings per share are expected to grow at an average rate of 10% through 2015, compared with 9% for Oracle, it is tough to justify IBM’s premium valuation. Its cash-adjusted market capitalization is about 13 times this year’s forecast earnings, a roughly 40% premium to Oracle.

But judging a rival to be overvalued isn’t necessarily the most compelling argument for Oracle’s own shares being undervalued. One big risk is that, to protect the installed base of customers that help Oracle generate free cash flow, it will have to cut better deals on the lucrative maintenance fees it charges.

Oracle has now missed its own financial targets in four of its past nine quarters, notes Cowen analyst Peter Goldmacher. As new rivals, and competing products, spring up, it is getting harder for Oracle to see its own future prospects clearly.

Filed under TMT Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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