A Case Study:
Oracle Systems Corporation
In 1977, Lawrence J. Ellison founded System Development Laboratories to sell a database management system he had developed in a CIA project. It was only in 1982 that the company was renamed to Oracle Systems Corporation, to reflect the success of their first product, Oracle Database. Oracle used the C programming language to create its products, which was a big part of its success since this allowed Oracle software to run on various platforms and eventually became the industry standard.
Oracle achieved highly impressive growth throughout its early years, almost always doubling their revenues per fiscal year from 1980 to 1990 (see Exhibit 1). They also made their shareholders very happy with a peak share price of $28.375 in 1990 from an issue price of $2.00 upon their initial public offering.
However, things were not as rosy as they seemed. In 1990, Oracle’s earnings had 0 growth. This was due to $15 million worth of sales being disallowed by auditors. In the first quarter, they also disclosed their first net loss of million.
They laid off around 400 of their US employees. These events, combined with the news that Oracle officers had already sold their stocks for a profit, enraged shareholders and prompted their stock price to plummet by $8.125.
As seen in the statement of challenges and objectives, Oracle is experiencing internal financial problems. From an analysis of the case, these problems were brought about by the change of corporate strategy. First, Oracle decided to change its compensation plans to one that is based on revenue targets. This action made Oracle’s sales people perform unethical practices in order to generate sales growth due to the pressure of the new compensation plans. Second, Oracle cancelled out sales territories. This made the satisfaction of both customers and salespeople go down. Finally, management kept pressuring the Oracle team to be the number one in the market. This pressure lead to rushed production of products, which were found to have glitches.
Red flags/Proof of 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 (ie 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.
CHALLENGE AND OBJECTIVES
The challenge for the company is to come up with a decision that will ultimately promote sustainable growth and increase shareholder wealth. In order to achieve this, the board must determine the overall health of the company, the changes that accompanied the decline of stock prices, and the rate of such changes.
The company’s objectives are to solve its current problems. Oracle is plagued by issues in several of its key accounts – the company’s accounting principles for one, proves to be flawed. Along with these, it is also evident that the company must fix its processes involving bad debt accounting and revenue recognition. They should also attend to their accounts receivable to come up with better terms that would make collections faster and more efficient.
Days in Accounts Receivables: 137 days (assuming 365 days)
Computation: = 365 / (970,844 / ((261,989 + 468,071) / 2)) Conclusion: Higher than the industry average at 62 days
Please see the next page for more analysis.
Table 1.1 A table comparing Oracle’s financial ratios with the industry average.
It’s noticeable how the company’s operations have been deteriorating as they are having a more difficult time translating sales into cash. Their A/R turnover is not where it needs to be, and in line with that, their liabilities are increasing as well. The company has also been inefficient with the use of their assets as their current activity ratios are not up to par with the industry standards.
After analysing Oracle’s historical data and financial statements as well as identifying key points for the company to consider, the group proposes the following recommendations in order to improve their current financial standing:
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 to accepted standards. This is also relevant to the reporting of bad debts expense as there exists 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 taking its toll on sustainable growth and employee welfare.
Given the analysis gathered by the team and the recommendations it has given, we ultimately propose that Oracle should change some of its accounting standards especially in recognizing revenue and its account receivables standards. Due to Ellison’s desire to grow the company and make more profit, actions considered unethical or at least doubtful were applied to increase revenue such as recognizing sale transactions early like even if the transaction has not been completely finalized, and selling products not even made yet which further increases the A/R account and their Bad Debt Expense. In the short run, this could easily increase the company’s net profit, however as what happened in reality, their failure to collect payment and deliver promised items meant that they had overstated their value and hurt the company in the long run.
In order to avoid such incidents, Oracle should revise its revenue recognition standards and make it more consistent with reality in order to not overstate or understate the company’s financial position. Even if its growth will not be as impressive as before, at least the company will be able to have a sustainable or healthy growth rather than an exponential one then only to fail. Also, the company would also benefit from stricter A/R terms in order to lessen their Bad Debt Expense and make more actual profit. In order to achieve these, management must come up with more realistic targets based on better forecasts from historical data and comparing their performance to competitors in the industry. Not only will this improve on the company’s health, but also gain back the trust of their stockholders.
Cite this Oracle Systems Corporation
Oracle Systems Corporation. (2016, May 13). Retrieved from https://graduateway.com/oracle-systems-corporation/