Oracle Systems Corporation

Lawrence J. Ellison established System Development Laboratories in 1977, where he marketed a database management system originally developed in a CIA project. The company was later renamed to Oracle Systems Corporation in 1982, after the triumph of their initial product, Oracle Database. Oracle utilized the C programming language to build its software, enabling it to function on diverse platforms and ultimately setting the industry standard.

Oracle experienced significant growth in its early years, consistently doubling their revenues each fiscal year from 1980 to 1990 (refer to Exhibit 1). Additionally, their shareholders were delighted with their stock reaching a peak price of $28.375 in 1990, starting from an initial offering price of $2.00.

Despite the seemingly optimistic outlook, the situation was not ideal for Oracle. In 1990, their earnings showed no growth due to auditors disallowing $15 million worth of sales. Additionally, in the first quarter, Oracle disclosed their first net loss of $36 million and had to lay off around 400 US employees. These occurrences, coupled with the revelation that Oracle officers had sold their stocks and made a profit, angered shareholders and caused the stock price to drop by $8.125.

Oracle is facing internal financial issues, as stated in the challenges and objectives. The change in corporate strategy is the root cause of these problems. Initially, Oracle modified its compensation plans to be based on revenue targets. This change led the salespeople to engage in unethical practices to drive sales growth under the pressure of the new compensation plans. Additionally, Oracle eliminated sales territories, resulting in decreased satisfaction among both customers and salespeople. Furthermore, management consistently applied pressure on the Oracle team to become the market leader, which resulted in hasty production of products that were later discovered to have glitches.

Red flags indicating internal financial problems:

1. From the analysis of Oracle’s financial ratios from 1985-1990, the inventory turnover, improved at a rapid amount (From 69.97 to 18.90). From ‘85-’90, inventory turnover, improved by 73%. The average inventory turnover of Oracle’s competitors, according to the data given is 73.14.
2. Oracle’s increase in wealth can be attributed to the increase in trade receivables in 1990. The balance sheet given indicates that Oracle’s receivables amounted to 82% of its current assets. Current assets were at 72% of total assets. The receivables industry average in 1990 was 31.8% of total assets. This proves that Oracle was performing risky investments.
3. Even though Oracle’s receivables were increasing, their allowances for doubtful accounts were decreasing. Data shows in 1987 ADA was 10.2% of receivables, and in 1990, ADA became only 6.1% or receivables even though receivables more than quadrupled from 1987. After investigating their receivables, it was found that the real value for ADA was 14.2% of the receivables in 1990.
4. In 1990, Oracle had a relatively low quick ratio compared to the other companies who had relatively high sales, or were at least comparable to Oracle (i.e. Microsoft, Computer Assoc., Lotus Development etc.). This was confusing as their sales/cash ratio was the highest, and was one third higher than the next closest ratio.

The company’s primary objective is to choose a solution that supports sustainable growth and enhances shareholder wealth. To accomplish this, the board needs to evaluate the company’s overall health, identify the factors responsible for declining stock prices, and determine the rate at which these changes are occurring.The company aims to tackle various challenges it currently faces, including flawed accounting principles, issues with bad debt accounting and revenue recognition processes. Additionally, it plans to enhance collection efficiency by improving accounts receivable terms.

Based on an analysis of Oracle’s historical data and financial statements, as well as the identification of key points for the company to consider, the group suggests the following recommendations to enhance their current financial position:

1. Currently, the collection period of Oracle is at 137 days, which is higher than the industry average of 62 days. The company must reduce credit terms implementing tighter credit control activities in order to improve its current and quick ratio as well as increase overall company liquidity.
2. Because Oracle Systems Corporation sells software contracts on a trial basis, there have been issues regarding the validity of financial results and bloated revenue values because of questionable revenue recognition standards. Because of this, the company must revise its financial management and accounting procedures and comply with accepted standards. This is also relevant to the reporting of bad debts expense as there exist illogical/suspicious discrepancies in the relationship of bad debts to the level of accounts receivables.
3. The current sales quota system has been identified as one of the causes for Oracle’s rapid revenue growth. Although the revenue growth is considered as beneficial in the short-run, the long-term sustainability of the company is being compromised. The company must consider a reevaluation of its corporate strategies and its revenue/sales-based compensation system which it currently takes its toll on sustainable growth and employee welfare.

Based on the analysis conducted by the team and their recommendations, our proposal is for Oracle to revise its accounting standards, particularly in terms of recognizing revenue and managing account receivables. This is motivated by Ellison’s objective of expanding the company and maximizing profit. However, certain actions were taken that could be perceived as unethical or at the very least questionable, such as recognizing sale transactions prematurely, even if they were not fully completed. Additionally, Oracle sold products that were not yet produced, resulting in an increase in the A/R account and Bad Debt Expense. While these actions may have initially boosted the company’s net profit in the short term, the reality was that they were unable to collect payments and deliver the promised items, leading to an overstatement of their value and ultimately harming the company in the long term.

In order to prevent similar incidents, it is suggested that Oracle revises its revenue recognition standards to align them more accurately with reality. This will help prevent the company from either inflating or deflating its financial position. Although the company may not experience as significant growth as before, it will be able to achieve sustainable and healthy growth, rather than experiencing a sudden exponential growth followed by failure. Additionally, implementing stricter accounts receivable (A/R) terms would be beneficial for Oracle as it would reduce their Bad Debt Expense and result in more actual profit. To achieve these goals, management must establish more realistic targets by analyzing historical data and comparing their performance with competitors in the industry. This not only improves the company’s overall health but also rebuilds trust among stockholders.