There is one second quarter earnings report that I’m itching to read; and it is that of Oracle (NYSE: ORCL). The Silicon Valley cash cow has been facing serious revenue losses and big legal troubles that might take it off the widows and stocks list.
Oracle’s biggest potential headache is a wrongful termination lawsuit filed by its former Senior Finance Manager for North America Saas/Cloud Revenue; Svetlana Blackburn. The suit accuses Oracle of firing Blackburn for threatening to blow the whistle on “unlawful accounting practices.”
Oracle accused of Unlawful Accounting Practices
If it is true the suit; Svetlana Blackburn vs. Oracle America Inc. is a ticking time bomb that threatens Oracle’s valuation and business model. Some of the allegations that Blackburn and her attorneys are making are potential dynamite. The potentially explosive claims include:
“Upper management was trying (and trying to push her) to fit square data into round holes, in an effort to bolster ORACLE Cloud Services financial reports that would be paraded before company leadership as well as the investing public,” the suit; filed June 1 2016 in US District Court for Northern California, states.
“Plaintiff’s superiors instructed her to add millions of dollars in accruals to financial reports, with no concrete or foreseeable billing to support the numbers, an act that Plaintiff warned was improper and suspect accounting,” Blackburn’s attorney Daniel Velton wrote.
“The data, she knew; would end up in SEC filings and be touted on earnings calls, used to paint a rosier picture than actually existed on the ground, Velton claimed. “Dollar amounts that might seem modest on their face would propagate through other data, influencing a host of statements on reports made to the investing public. Executives above her in the chain of command went ahead and added accruals on their own; once again, Plaintiff objected.”
“A supervisor instructed her to ignore the absent billings that she had pointed out, because his intention was to reaccrue,” Velton alleged. “After confronting him about the dangers of a lack of billings, and the history of bad accruals that never resulted in billings, the supervisor told her that her statements were “irritating.”
Blackburn was fired a few weeks after making those complaints.
This suit is potential dynamite because it seems to point straight at Larry Ellison and his management team. Even if Ellison was not involved in these alleged shenanigans he certainly looks very, very bad. I wonder how Larry will be able to keep his job if Velton and Blackburn can prove these allegations.
Alphabet Lawsuit could Destroy Oracle’s Business Model
Blackburn’s suit comes at a very bad time for Oracle, because the company just suffered a major court defeat to Alphabet (NASDAQ: GOOG): that could threaten its business model and some revenue streams.
A jury ruled that the company formerly known as Google; did not violate copyright laws when it used 11,000 words of Oracle’s Java code in its Android phone operating system, on May 26, The New York Times reported. That case threatens Oracle’s business model because it might mean that other companies are now free to use some of its products without paying.
Oracle had sued Alphabet (NASDAQ: GOOGL) alleging that it had violated copyright by using Java in in Android. If this precedent stands; it means that anybody might be free to use Java or parts of Java in their software.
The potential losses for Oracle here are far greater than the $9 billion it was asking for because java is at the heart of Oracle’s software. Legal experts think this case will drag on for years, and that it will ultimately be up to the US Supreme Court to settle matter. That means much of Oracle’s business model will be in doubt for years to come.
Oracle’s Falling Revenue
This news will obviously cause value investors to ask if Oracle is a good company going through a bad spell. To answer that we will have to take a look at the financials and they are most definitely a mixed bag.
Oracle has suffered a serious decline in revenue over the past year. The company reported TTM revenues of $38.84 billion in February 2015; that fell to $37.16 billion a year later. If ycharts’ numbers are correct, Oracle’s revenues fell by $1.68 billion in a year.
These figures indicate a major drop in sales that seems to be constant. The company’s revenue fell by $310 million in fourth quarter 2016 and $610 million in third quarter 2016. Oracle is going to need to take steps to increase its sales if it wants to avoid continuing losses.
Is Oracle Making Money?
Naturally value investors will want to know if Oracle is still making money; and if so can it keep making money at that rate. The answer is possibly not.
Oracle’s net income fell by nearly $2 billion ($1.987 billion to be exact) between February 2015 and February 2016. Oracle reported a net income of $10.83 billion for fourth quarter 2015 and $8.843 billion for fourth quarter 2016.
Cash from operations is also down slightly. Oracle reported $14.51 billion in cash from operations in February 2015 and $14.11 billion in February 2016. That figure indicates a drop of around $40 million in the cash the company is generating.
Oracle is still a Value Investment
Despite that Oracle still has a lot of cash in the bank; $50.77 billion on February 29, 2016. That number has actually improved significantly despite the revenue loss. Oracle reported $43.78 billion in cash and short-term investments in February 2015; which means the amount of cash it has in the bank increased by $6.99 billion in a year.
These figures show us that Oracle is a good company with a lot of float. It is still a really good investment that belongs in your portfolio. The company reported a profit margin of 23.77%, a free cash flow of $3.106 billion and a diluted earnings per share number of 2.028 for the fourth quarter of 2015. It rewarded shareholders with a dividend yield of 1.52% and a return on equity of 18.76%.
Oracle is still a value investment; but it is a stock to watch. There are some potential problems in Larry Ellison’s company; which might cause share prices to tumble. That means Oracle might be a good buy despite the problems, because it is still a great stock with a lot of float.