Oracle appears to be executing very well and has been aggressive on acquisitions. It continues to surprise financial analysts with positive results. However, it is also on a short list of technology companies where the board appears to be a subordinate to the CEO. It is rather unique in terms of CFO churn, having just lost its last CFO after only a year and a half of service, and he was one of the longest-lasting.
The Sun acquisition clearly isn't going well and the firm has engaged in a battle with HP that should have a large number of its customers reconsidering their purchase, yet none of this appears to be having a significant, adverse impact on performance. This suggests that the risk that is being reported isn't entirely accurate and the company is likely to be heavily focused on increasing revenues by increasing costs.
Having been through cycles like this before - first with IBM and then with Microsoft - while there may be no fire under this smoke, it may be more prudent to assume otherwise.
Oracle: Corporate Governance
Oracle appears to be one of the best-run companies in the world, but appearances, as we learned from the financial collapse and particularly Bernie Madoff's fall, can be very deceiving. We know that the SEC is ill-prepared to step into the role of financial auditor and is more focused on insider trading issues at the moment than financial accuracy. In terms of companies, we should have come around to the idea that boards and CFOs should be tightly aligned and focused on preserving shareholder value, and red flag cases where the CFO and board effectively work for the CEO. In addition, we should now be aware that any CEO who appears to be paid and spends exorbitantly is a sign of a possible problem, and a CEO who appears to step outside accepted rules represents an additional risk.
At the moment, each of these items can be found in Oracle. On HP's move to remove its last CEO for sharing insider information and attempting to conceal the act, Ellison was outspoken that the HP board misacted and he hired Mark Hurd, the disgraced HP CEO. Regardless of Hurd's guilt or innocence, this showcased a complete disregard for a board's ability to act as employer for the CEO and reflects on how Oracle's board likely behaves.
Larry has consistently ranked towards the top in CEO compensation and he clearly is known for his expensive tastes. This suggests that in choices of financial reporting he is in extraordinary conflict and we have certainly seen a number of top executives fail when put in similar positions.
Finally, the last three CFOs only lasted between four months and one-and-a-half years, suggesting that either Oracle has a problem selecting CFOs who can do the job, or there is a fundamental difference between Larry and the CFO in some critical area, with reporting being the most probable. Currently, Safra Catz, co-president of Oracle and one of the most capable managers in technology, has been named CFO. Having interviewed her, my assessment is that she puts herself at a lower rank to Larry as she answered most questions regarding process with "Whatever Larry wants." This certainly suggests that Oracle's CFO is a subordinate to its CEO, which is a red flag for some of us in corporate governance.
This also suggests that there is a high probability that there is, or will be, an increasing gap between what Oracle reports and what it is actually achieving. This should put substantial pressure on operational management to increase revenues in areas where it has direct control, such as maintenance agreements and pricing, in order to close this gap before it is discovered.
Hardware Maintenance Pricing: Second Canary in the Coal Mine
This has a number of us looking for changes in pricing that may represent an expected impact from these policies. Early warnings came from what appeared to be exorbitant pricing for virtualizing Oracle's products, which customers were reporting mirrored what they were paying for VMware, their preferred virtualization engine. In short, they were seeing upcharges from Oracle for using VMware that equaled VMware's own changes and appeared to be an Oracle tax. A tax from a vendor is a charge that isn't connected to any additional value and appears to be an opportunistic way to raise revenue.
Most recently, Oracle appeared to increase support charges for Sun hardware, particularly with regard to penalties for discontinuing support and reinstating it. This 150 percent upcharge is similar to what is already in place for Oracle software and may simply be an alignment of the services, but it could also be taken as a penalty that comes on top of escalating service charges in order to provide a disincentive for discontinuing service.
Be aware that in both instances this may simply be Oracle using its pricing power to disincentivize behavior that it is trying to stop, like using VMware and using a third-party service provider in place of Sun hardware. However, it would seem wise to put a monitor on Oracle billings and see if the company is increasing period over period at an excessive rate to make sure that both these ongoing charges and the rate they are increasing remain acceptable. If they don't, you should be prepared to red flag this and put in place a plan to mitigate the damage.
Wrapping Up: Anticipating a Problem
Back in the 80s, IBM, which was facing revenue shortfalls due largely to the combination of a series of bad decisions, began raising prices indiscriminately. Nearly a decade later, Microsoft, in an attempt to make pricing simpler, found a large number of companies that were underpaying their contracts and it instituted corrective action. In both cases, the CIOs were caught unprepared and the result was a largely unplanned move to either slow or reverse the use of the companies' products.
It would appear that Oracle is likely to either be on, or to shortly be on, a similar path (much of what I currently have are anecdotal complaints on Oracle pricing at the moment). However, it would be prudent to monitor recurring Oracle pricing and make sure increases appear justified and that trends won't cause them to cross over so you can either anticipate a move or be assured that an executive review won't force an unplanned migration. This practice is prudent with any large vendor, but given the recent CFO changes at Oracle, its history and recent contract changes on the hardware side of the company, it may be more critical with Oracle.
Or put another way: If there is a lot of smoke, best to check aggressively for a fire, which is something I coincidently learned myself the other day when a Li-Ion battery pack overcharged and caught fire in my garage. There is a lot of smoke surrounding Oracle at the moment.