Larry Ellison’s One-Man Show

Oracle Corp. CEO Lawrence J. Ellison isn’t afraid to go it alone, on land

or at sea. Last month, because of what he considered "prima donna"

behavior, Ellison demoted one of four veteran skippers of his elite yachts,

which will compete for the America’s Cup this fall in New Zealand. It was the

second such move in less than a year.

Sailing enthusiasts should hope that Ellison does better without his skipper

than Oracle Corp. has done since losing a handful of senior execs over the past

two years. The latest piece of bad news came on Mar. 1, when Oracle warned it

would fall short of its earnings forecast for the third fiscal quarter, ended

Feb. 28. Oracle is expected to be just a penny shy per share, but this is the

second time in a year that the company has disappointed. Analysts expect

quarterly revenues of $2.4 billion, down 10% from a year earlier. The stock,

trading at $14, has plummeted 70% from its peak 18 months ago and is down 12%

since Oracle warned of the shortfall.

Ellison

can’t blame the crummy economy for this one. Once-fleet Oracle is in danger of

becoming a slow-growth company even after the economy picks up. Its core

database market is maturing and is expected to grow just 1.6% this year and 3.5%

next year, according to Gartner Dataquest. And the rest of Oracle’s products

aren’t humming either. But the software was buggy, and sales have been dismal.

They shrank 26% in the fiscal second quarter.

Making matters worse, while Oracle is stuck in the doldrums, other big

software rivals that were late to the Net are now sailing faster than the

company. PeopleSoft’s revenues climbed 19% last year, and SAP and Siebel

Systems saw revenues grow 17% and 14%, respectively. This year, Oracle’s sales

are expected to drop 9.7%, to $9.8 billion, and to increase only 2.5% in fiscal

year 2003, says US Bancorp Piper Jaffray. "Oracle? They’re dead in the

water," crows PeopleSoft CEO Craig A. Conway.

Not at all. Oracle is still one of the most profitable software companies in

the world. Net income is expected to come in at about $540 million in the fiscal

third quarter, down $42 million from the year-ago quarter. Its 35% operating

margin trails only Microsoft Corp. and Check Point Software Technologies, which

makes security software. And its efforts to fix the buggy software are starting

to pay off.

And Ellison plans on revealing his strategy for boosting revenues. His pitch:

Customers should forgo the hassle and expense of installing new applications on

their own computers and instead pay Oracle monthly fees to handle all that at

its data centers. "Guaranteed, you will never have to pay for another

upgrade. You will never pay for another piece of software. You will never pay

for another piece of hardware," says Ellison. He says customers will cut

their bills by half, and, within a few years, the business could add $1 billion

to Oracle’s annual revenues.

This isn’t a new push for Oracle, but Ellison says he has a fresh take on

how to gin up business. Oracle began hosting corporations’ software three

years ago. Ellison says the difference now is that Web hosting has become a

priority for his company. Every Oracle sales prospect will be presented with the

hosting alternative before they buy new software. And Ellison plans on owning

computer centers to ensure quality.

No matter how he rejiggers things, hosting may not reenergize Oracle. The

company logged just $50 million in hosting sales last fiscal year. While

analysts believe the $1 billion goal is possible, they say it will likely take

up to five years to get there. "They need to sell software," says

analyst Robert Schwartz of Thomas Weisel Partners.

What the company also needs is management reinforcements. Three years ago,

rather than playing his normal big-think role, Ellison gradually took over daily

management and transformed the company’s internal operations using Internet

technology. That ranged from centralizing data-processing operations to

automating sales. Some results were positive: Oracle’s operating margins

doubled in two years.

In other areas, Ellison has been his own enemy. His insistence on running

operations led to the departure of a handful of key executives, starting with

former President Raymond J. Lane some 21 months ago. Lane had helped lead the

company to nine straight years of healthy growth. Next to go was Gary L. Bloom,

who was being groomed for a top slot but left to become CEO of Veritas Software

Corp. after Ellison made it clear that he would continue his tight control of

Oracle. In the past year, Oracle has lost two top sales execs, one because of

health problems and another was forced out, according to former executives.

"Larry has done a marvelous job of setting direction, but he needs somebody

to execute on his vision. It takes two people to run these companies," says

analyst Rick Sherlund of Goldman, Sachs & Co.

Even Ellison’s defenders admit he has his hands full. Oracle Chief

Financial Officer Jeffrey O. Henley says concerns that Ellison has taken on too

much are fair–although he insists Ellison’s management style hasn’t harmed

Oracle’s performance. Others disagree. A former executive says Ellison does

well when he focuses on one thing at a time: "If he fixes one part of the

business, another one is going to have to slip."

Oracle denies this, and Ellison says he has a strong right hand in Executive

Vice-President Safra A. Catz. Ellison says he offered the COO title to Catz, but

she turned him down because she wanted to stay out of the limelight. Ellison

says Catz probably wants to avoid the divisiveness of Lane’s final days at

Oracle–when the pair feuded over Lane’s diminished role.

"There was a public war inside the company," says Ellison. "I

think she is afraid of creating a fracture" by becoming COO.

There’s no denying that Ellison’s management stumbles can be traced back

to the spring of 2000, when he and Lane had their falling out. The delivery of

the Oracle 11i business suite, the package of Net software, had been delayed for

months and Ellison lost patience. He insisted on shipping it that May–ready or

not. But 11i was riddled with glitches. Industry analysts estimate the suite

required 5,000 to 7,000 "patches" to fix faulty programming.

Once customers loaded the software on their computers, they were in for

unpleasant surprises. Execs at Dallas-based shipper Dynamex Inc. are still

peeved about the human resources software they bought from Oracle last year.

Because of quality problems, the software took longer than expected to install,

and Dynamex felt Oracle should pick up the tab in extra consulting costs–some

$25,000. Dynamex felt it couldn’t abandon the $3.5 million project, so it hung

in. Still, "I walked away with a bad taste in my mouth," says James H.

Wicker III, vice-president of information systems at Dynamex.

Ellison doesn’t apologize for shipping buggy software. He says it was

unavoidable because the product was so complex. But, a year ago, he made matters

worse at an Oracle conference in New Orleans when he blamed customers for their

frustrations with his software. It would work fine, he said, if they stopped

tinkering with it to fit their business processes.

Ellison says he’s doing his best to make things better for customers. The

hosting alternative eliminates headaches for customers. Plus, he’s pushing a

new database technology called "rapid application clustering." The

idea: A bunch of databases can run on smaller computers and act like one big

database. It’s billed as less expensive because it runs on cheaper computers,

and it’s more dependable: If one computer fails, the others keep running.

The success of these new gambits is anything but assured. Ellison might have

a tough time selling clusters of small databases–since he has long insisted

that large, centralized databases are best for big corporations. Still, he’s

forging ahead with what he does best–creating new technology. If Ellison doesn’t

get something going soon, it’s going to be hard to blow the wind back in

Oracle’s sails.

By Jim Kerstetter in Redwood Shores, Calif., with Steve Hamm in New York and



Andrew Park in Dallas in BusinessWeek. Copyright 2002 by The McGraw-Hill Companies, Inc