Oracle Systems Corporation

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Oracle Systems Corporation

500 Oracle Parkway
Redwood Shores, California 94065
U.S.A.
(415) 506-7000
Fax: (415) 506-7200

Public Company
Incorporated: 1977
Employees: 8,160
Sales: $1.18 billion (1992)
Stock Exchanges: NASDAQ

Oracle Systems Corporation is the largest supplier of database management systems software and the third largest independent software and services company in the world. The company’s principal business activities include the development and marketing of an integrated line of computer software products used for database management, computer-aided systems engineering, applications development and decision support, as well as families of software products used for financial, human resource, and manufacturing applications. Through its subsidiaries, Oracle markets its products along with related consulting, educational, support, and systems integration services in more than 90 countries.

Oracle Systems Corporation traces its roots to 1977 when two computer programmers, Lawrence J. Ellison and Robert N. Miner, teamed up to start a new software firm. Ellison had been a vice president of systems development at Omex Corporation and a member of a pioneering team at Amdahl Corporation, which developed the first IBM-compatible mainframe computer, while Miner had served as Ellison’s former supervisor at another computer company, Ampex Corporation. Both men had significant experience designing customized database programs for government agencies, and the pair persuaded the Central Intelligence Agency (CIA) to let them pick up a lapsed, $50,000 contract to build a special database program. Ellison and Miner then pooled $1,500 in savings to rent office space in Belmont, California, and start Oracle for the purpose of developing and marketing database management systems (DBMS) software. Ellison became president and chief executive and took charge of sales and marketing for the new company, while Miner supervised software development. The pair of entrepreneurs sought out well-known private venture capitalist Donald L. Lucas to become chairman of the board.

While working on the CIA project, Ellison continued monitoring technical documents published by IBM, a practice he had established while working as a programmer at Amdahl. Ellison noticed that the computer giant was interested in new types of speedy, efficient, and versatile database programs, called relational databases, that were projected to one day allow computer users to retrieve corporate data from almost any form. What was expected to make this possible was the IBM innovation called the Structured Query Language (SQL), a computer language that would tell a relational database what to retrieve and how to display it.

Banking on what later proved to be a correct hunch—that IBM would incorporate the new relational database and SQL into future computers—Ellison and Miner set out to provide a similar program for Digital minicomputers and other types of machines. In 1978 Miner developed the Oracle RDBMS (relational database management system), the world’s first relational database using SQL which would allow organizations to use different-sized computers from different manufacturers but still standardize on software. A year after its pioneering development, Oracle became the first company to commercially offer a relational database management system, two years before IBM debuted its own RDBMS system.

After its initial innovation, Oracle quickly became profitable, and by 1982 the company, then with 24 employees and a mainframe and minicomputer customer base of 75, reported annual revenues of nearly $2.5 million. That same year the company began its international expansion with the creation of Oracle Denmark. About one-fourth of 1982 revenues were poured back into research and development, leading to a 1983 Oracle innovation, the first commercially available portable RDBMS. The portable RDBMS enabled companies to run their DBMS on a range of hardware and operating systems—including mainframes, minicomputers, workstations, and personal computers—and helped Oracle to double revenues that year to over $5 million.

By the early 1980s Oracle began jousting with new entrants in the DBMS market. But the company’s reputation for innovations and its aggressive style of advertising, which mentioned competitors’ products by name, helped to push Oracle’s sales upward, and by 1985 the company logged better than $23 million in revenues. The following year annual sales more than doubled to a record $55.4 million.

The year 1986 proved to be transitional and historical for Oracle in a number of respects. In March, Oracle made its first public offering of stock, selling one million common shares. That same year Oracle lauded itself as the fastest-growing software company in the world, having recorded 100 percent-or-better growth in revenues in eight of its first nine years. Much of that growth came from Oracle’s targeted end users—multinational companies with a variety of what had previously been incompatible computer systems. By 1986 Oracle’s customer base had grown to include 2,000 mainframe and minicomputer users represented by major international firms operating in such fields as the aerospace, automotive, pharmaceutical, and computer manufacturing industries, as well as a variety of government organizations.

To serve those customers, by 1986 Oracle had established 17 international marketing subsidiaries based in Australia, Canada, China, Europe, and the United Kingdom to market Oracle products in a total of 39 countries. By the same time, Oracle had also expanded the scope of its business operations to include related customer support, education, and consulting services.

One of the principal reasons for Oracle’s success during the mid-1980s was the 1986 emergence of SQL as the industry standard language for relational database management systems, which in turn led to increased market acceptance of Oracle’s SQL-compatible RDBMS. In 1986 Oracle expanded its RDBMS product line and debuted another industry first, a distributed DBMS based on the company’s SQL*Star software. Under the distributed system, computer users could access data stored on a network of computers in the same way and with the same ease as if all a network’s information were stored on one computer. Although initially limited to operating principally on IBM and IBM-compatible computers, the Oracle SQL*Star software was the first commercially available software of its kind and was soon expanded to include dozens of additional computer brands and models.

By 1987 Oracle had emerged as the relational DBMS choice of most major computer manufacturers, allowing the company to expand the scope of hardware brands on which Oracle’s products could operate. Largely as a result of such acceptance, in 1987 Oracle achieved two major milestones by topping $100 million in sales and becoming the world’s largest database management software company with more than 4,500 end users in 55 countries.

During the late 1980s Oracle’s growth had a spiralling and enticing effect within the computer industry, allowing the company to further expand its development, sales, and support partnerships with computer hardware manufacturers. Oracle’s partnerships with software manufacturers also began to blossom, and in 1987 the number of software companies using Oracle products as a foundation for their software applications grew five-fold. In order to maximize the benefits of these partnerships, in 1987 Oracle established its VAR (Value-Added Reseller) Alliance Program, aimed at building cooperative selling and product-planning alliances with other software manufacturers.

Oracle continued its tradition of innovation and firsts in 1988 when it introduced a line of accounting programs for corporate bookkeeping, including a version of a database for personal computers to work in conjunction with the Lotus Development Corporation’s top-selling Lotus 1-2-3 spreadsheet program. That same year the company introduced its Oracle Transaction Process Subsystem (TPS), a software package designed to speed processing of financial transactions. Oracle’s TPS opened a new market niche for the company, targeting customers such as banks that needed software to process large numbers of financial transactions in a short period of time.

In 1988 Oracle unveiled its initial family of computer-aided systems engineering (CASE) application development tools, including its CASE Dictionary, a multi-user, shared repository for items pertaining to a computer application development project; and CASE Designer products, a graphical “workbench” of computer tools that enabled computer application analysts and designers to develop diagrams directly on a computer screen and automatically update the CASE Dictionary.

During its first decade of operations Oracle’s relational database system was expanded to operate on about 80 different hardware systems. Extending its alliances with hardware manufacturers, in 1988 Oracle introduced its first version of a database management system program to run on Macintosh personal computers. Also in that year Oracle formed the subsidiary Oracle Complex Systems Corporation (OCSC), adding systems-integration services to its line of customer services. Shortly after the subsidiary was formed, OCSC purchased Falcon Systems, Inc., a systems integrator company.

In 1989 Oracle’s emergence as a major player in the software industry was recognized by Standard & Poor Corporation, which added Oracle to its index of 500 stocks. That same year the company relocated its corporate headquarters from Belmont to a new, larger office complex in nearby Redwood Shores, California. Seeking to break into new markets, Oracle formed the wholly owned subsidiary Oracle Data Publishing in December of 1989 to develop and sell reference material and other information via electronic form. Oracle closed its books on the 1980s posting annual revenues of $584 million while netting $82 million.

Oracle entered the 1990s anticipating continued high growth and in January 1990 the company decided to seek $100 million in public financing to support its expansion. But the company’s expectations were misplaced and its image as a darling of Wall Street soon began to tarnish. In March 1990 Oracle announced a record 54 percent jump in quarterly revenues but only a 1 percent rise in net earnings. The company’s first flat earnings quarter, attributed to an accounting glitch, shook Wall Street out of a long love affair with Oracle; the day after the earnings announcement the company’s stock plummeted $7.88 to $17.50 in record one-day volume with nearly 21 million of the company’s 129 million shares changing hands.

In April 1990 a dozen shareholders brought suit against Oracle, charging the company had made false and misleading forecasts of earnings. On the heels of that suit, Oracle announced in May that it would conduct an internal audit and immediately restructure its management team with Lawrence Ellison assuming the additional post of chairman, while Lucas remained a director. Oracle also formed a separate domestic operating subsidiary, Oracle USA, aimed at addressing management and financial control problems of domestic operations, which the company attributed to poor earnings. Gary D. Kennedy was named president of the new subsidiary.

For the fiscal year ending May 31, 1990, Oracle initially posted record sales of $970.8 million and a net of $117.4 million. But those results were below Oracle’s own estimates and the company’s stock price responded by falling $2.50 to $19.88. Oracle’s stock plunged deeper in August to $11.62 after the results of an internal audit were released and Oracle restated earnings for three of its four fiscal 1990 quarters, although initially the restatement did not effect annual sales and earnings.

Late in August of 1990 Oracle negotiated a $250 million revolving line of credit from a bank syndicate. A few weeks later Oracle reported the company’s first-ever quarterly loss, posting a net loss of nearly $36 million with expenses outpacing revenues by 20 percent. Stockholders suffered a quarterly loss of 27 cents a share and Oracle’s stock tumbled to $6.25 a share on the announcement, with the stock having lost more than $2.7 billion in market value in six months.

In response to widespread criticism concerning overzealous sales techniques, revenue recognition methods, poor management controls, and miscalculations of market strength, another management shakeup followed. After less than four months on the job, Kennedy was replaced as president of Oracle USA by Michael S. Fields, a company vice president. Oracle also moved to reduce its annual growth rate goals from 50 to 25 percent, then laid off 10 percent of its domestic work force of 4,000, cut two levels of its five-tier sales hierarchy, consolidated Oracle USA’s financial and administrative operations to come under corporate management control, and folded various international organizations into a single division.

With Oracle’s stock tumbling, the company’s board approved an anti-takeover stockholder rights plan in December of 1990, making any hostile attempt to acquire the firm more expensive and more difficult. Despite Oracle’s most turbulent year in its history, 1990 was not without its firsts. With communism bowing out in Eastern Europe, the subsidiary Oracle Eastern Europe was formed to serve Oracle’s first customer sites in Bulgaria, Czechoslovakia, Hungary, Poland, Romania, and what was then the Soviet Union.

Oracle began 1991 on a sour note, however, reporting in early January quarterly losses of $6.7 million despite a 29 percent increase in revenue. The report again sent shock waves rippling through Wall Street, and Oracle’s stock fell to $6.62. By the middle of January 1991 Oracle’s bankers had cut the company’s line of credit from $170 million to $80 million while granting the company much-relaxed loan covenants.

Oracle announced in March 1991 that it would restate prior financial results because of accounting errors and name a new chief financial officer, Jeffrey Henley. As part of its restatement, Oracle adopted a change in accounting methods requiring that sales be booked when software was delivered, not when a contract was signed as previously allowed. Oracle’s restatement of 1990 figures lowered annual revenue more than $50 million to $916 million and decreased earnings about $25 million to $80 million. The increased need to use reserve funds for accounts receivable put Oracle in violation of its loan covenants and for the second time in as many fiscal quarters the company was forced to seek a waiver of loan requirements.

Oracle’s sales growth continued to decline from previous years and the company was forced to admit it overexpanded. For fiscal 1991 Oracle topped the $1 billion sales plateau for the first time in history and at the same time posted its first annual loss in history, of $12.4 million. In October of that year Oracle secured a new $100 million revolving line of credit from another bank syndicate. Two months later Oracle negotiated an agreement for $80 million in financing from Nippon Steel Corporation, which also agreed to sell Oracle products in Japan. In return, Nippon was given rights to purchase as much as 25 percent of Oracle Japan, Oracle’s marketing subsidiary in Japan.

By the end of its 1992 fiscal year, Oracle’s balance sheet had improved as sales inched modestly upward and earnings rebounded, with the company logging $1.18 billion in sales while netting $61.5 million. Oracle entered 1993 with no bank debt, solid long-term financing in place, and in an improved financial position controlled by a revamped management team.

The company’s plans for 1993 included the debut of its latest generation of a relational database, Oracle 7. The company also expected to deliver a series of products providing Oracle RDBMS users with access to data on other manufacturers’ relational database management systems. As an extension of its data publishing operations, Oracle’s future might also include a pending joint venture with McCaw Cellular Inc. to create a data broadcasting system in the United States on McCaw’s spectrum of cellular frequencies. Oracle also hopes to establish a similar broadcast system in Europe and Asia with help from partners in those regions.

Oracle’s future in the near-term is not likely to include the explosive growth that made it a one-time favorite of Wall Street and pleased investors who watched revenues sail from $23 million in sales in 1984 to nearly $1 billion in 1990 with earnings routinely growing in excess of 100 percent a year. As Oracle’s chief executive Ellison told Forbes magazine in 1991: “You pay a price for growing too rapidly.”