GMI RATINGS: Here's Why We Don't Trust The Numbers From Oracle

Larry EllisonLarry Ellison

Photo: Business Insider

Oracle Corp. dazzled the market on Tuesday with its earnings and allayed fears about an executive leaving. Nonetheless, those who take the software company’s financial statements at face value continue to expose themselves to the risk of less pleasant surprises.rumours swirled Monday that Keith Block, Oracle’s executive vice president of North America sales and consulting, had left the company he joined in 1986. He wrote instant messages that became public recently, in which he had criticised Oracle’s hardware business and co-president Mark Hurd. Among other things, Block said Oracle “bought a dog” when it acquired Sun Microsystems for around $7.4 billion in 2009, according to news reports.

Oracle swept in with an announcement, reportedly three days ahead of schedule, that its total sales rose 1% to $10.92 billion during the three months ended May 31 compared to the same period last year.  Without directly addressing the rumours, Hurd said on a conference call Monday that Oracle had asked Joanne Olsen, its senior vice president for cloud computing services, to run its North American applications business.

After the news Oracles’s stock price gained more than 3% to trade at $27.97 per share early on Tuesday, recovering some of the 2.1% in value it had shed amid the market worries on Monday.

Oracle has shuffled its executive ranks more than once. In December 2009, Oracle’s board member and president Charles Phillips told CEO Larry Ellison that he wanted to transition out of the company. Ellison asked him to stay on through the Sun integration, and in September 2010 the company announced his departure. Then Ellison’s buddy Hurd, faced with a sexual harassment lawsuit, left his job as CEO of Hewlett-Packard Co. to become president and director at Oracle in 2010. (Ellison said HP’s board had “made the worst personnel decision since the idiots on the Apple board fired Steve Jobs,” according to an August 2010 article in the New York Times.) In October that year Oracle said N.R.K. Raman resigned from the board and from his role as CEO of Oracle Financial Services Software Limited, to be replaced by Chaitanya M. Kamat. And then Oracle’s CFO Jeff Epstein resigned, after which Oracle said in April 2011 that its president Safra Catz would add his CFO responsibilities to her own; she remains in this capacity.

Meanwhile Oracle has had run-ins with regulators for years. For example, the Justice Department said in October 2011 that Oracle agreed to pay more than $199.5 million for allegedly failing to meet its contractual obligations to provide the General Services Administration with accurate information about its sales practices.

Due to red flags such as these, GMI gives Oracle an F on its overall corporate governance. The company’s financial statements reflect an AGR score of 13, indicating more accounting and governance risk than 87% of comparable companies.

Some might argue that such uncertainty is already priced into Oracle’s shares, which do look cheap. As of Tuesday intra-day Oracle’s stock price amounted to 14.73 times the trailing twelve-month average of its earnings per share, compared to the industry average of 35.87 times. But to have confidence in this comparison, you must assume that Oracle’s earnings statements reflect reality.

Of course U.S. company statements are always vetted for their accuracy – with all the efficacy apparent in the system. And when a company publicly implies that sexual harassment is OK, repeatedly gets into trouble with the law, and has executive-level shuffles, this doesn’t necessarily mean it also lies about financial performance.  But even so, it might be safer to do business with others who have not had such problems.

Or you could take Ellison’s word for it that his sales grew in the quarter ended this May and, like others on Tuesday, get excited enough to buy.


Region:   North America
Sector:  Technology
Industry:  Software
Market Cap:  $ 135,123.9mm (Large Cap)
ESG Rating:   F
AGR:   Very Aggressive (13)

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