Database days may be numbered for Oracle, Informix

Oracle Corp.'s disappointing second-quarter earnings received a frigid response from Wall Street on Tuesday as its stock fell $9.63 per share, or 30 percent, to $22.75 in afternoon trading, raising questions about the company and the overall health of the database software market.

Monday's revelation that Oracle's earnings fell at least four cents shy of most Wall Street projections highlights the difficulties facing major database software vendors. They had enjoyed 30 percent to 40 percent annual growth over the past four to five years. That era is over. Now, Oracle, Informix Corp. and the rest of them are struggling to adjust.

Putting aside Oracle's second-quarter debacle, there are fundamental market dynamics conspiring to wreak havoc on these companies' bottom lines.

They face stiff competition from packaged off-the shelf applications, which provide cheaper, easier-to-deploy solutions than building databases from the ground up. The prevalence of the Windows NT platform and small- to mid-sized servers also gives customers cheaper options to the behemoth systems that were once the cash cows for Oracle.

"There's no question that packaged applications are becoming a dominant factor in this market, and these vendors are struggling with this trend," said Carl Olofson, a software analyst at International Data Corp. "They benefit from it by packaging their products through the channel but they also are facing intense competition from application vendors."

Internal strife of varying magnitudes has crippled these database companies so that customers are losing faith in Oracle or Informix's ability to deliver.

Bert Hochfeld, an analyst at Josephthal Lyon & Ross, was one of the few who benefited from Oracle's poor performance. His firm recommended short selling the stock in anticipation of lackluster earnings.

"I basically felt the database business has been slowing for a long time," Hochfeld said. "Relational technology is at the end of the growth curve and I'm not sure Oracle has the vision, which starts at the top, to correct their prospects."

Oracle's stock performance in the past year supports Hochfeld's argument. After peaking near $42 per share in August, the stock has slid almost 50 percent in less than four months, with most of that decline coming in Tuesday's trading. Oracle did post a profit of $187 million, or 19 cents per share, on $1.6 billion in revenue in the quarter, but that's only a penny more per share than the year-ago quarter.

"Another big problem for Oracle is the climate there," Hochfeld said. "They've chased off some of their best and brightest salespeople and have no sense of teamwork whatsoever. There's an arrogance that's inexplicable. They talk a lot about thin-client but that's hardly a mantra to keep people awake at night."

Informix' problems are even more severe. After twice restating financial results from years past, NASDAQ officials initiated delisting procedures to have the stock pulled off the trading floor. Those procedures, in fairness, are mainly a formality anytime a company makes drastic financial restatements, but underscores the internal problems Informix is still battling to correct.

"Well, Informix really has nowhere to go but up after all the problems they've had recently," Olofson said. "They have good technology but it's too early to say whether the market has a handle on their financial problems or even if they do. Their problems have consistently been an inability to market and sell their solutions."

A quick glance at Informix' stock tells a more compelling story. It was trading at $25 per share in January and has since fallen to $5.70 per share as of Tuesday afternoon.

And just when it seemed that things couldn't get worse, here comes Microsoft Corp.

"Microsoft's strength is in the small- and mid-size server areas, which is where most of the growth is," Olofson said. "They have a huge advantage because they are considerable cheaper solutions. And you can never underestimate the advantage of being the platform provider, grabbing mind share and market share in equal measures."

Rick Sherlund, an analyst at Goldman Sachs, said the competition will step up to another level next year when Microsoft rolls out NT 5.0.

"You're seeing investors taking a rather dim long-term view of these stocks, and I agree," Sherlund said. "You throw Microsoft in there, and that dampens enthusiasm even more."