Content 1.0 Introduction 2.0 Objectives 3.0 Problems 3.0.1 Management 3.0.2 Financial 3.0.3 Product 3.0.

4 Workforce 3.0.5 Investors 4.0 Financial Ratios A. Profitability Ratio i. Return on Assets (ROA) ii. Return on Equity (ROE) iii. Net Profit Margin B. Efficiency Ratio i. Days Sales Outstanding ii. Inventory Turnover C. Liquidity Ratio i. Current Ratio ii. Quick Ratio D. Financial Leverage i. Debt/Total Assets ii. Debt/Equity iii. Times Interest Earned 5.0 SWOT Analysis 6.0 Recommendations and Ideas A. Management and marketing 1. Competitive Advantage 2. Be Realistic 3. Segmentation 4. Focus Group Interviewing B. Accounting 1. Independent Review 2. Assign External Auditor 3. Change Revenue Recognition Method 7.0 Conclusion Exhibit Exhibit 1 Oracle Timeline Exhibit 2 Cause and Effect Diagram (Fishbone) Exhibit 3 Profitability Ratio Exhibit 4 Days Sales Outstanding Exhibit 5 Inventory Turnover Exhibit 6 Liquidity Ratio Exhibit 7 Debt/Total assets Exhibit 8 Debt/Equity Exhibit 9 Times Interest Earned Exhibit 10 Summary of Recommendations

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1.0 INTRODUCTION. Exhibit 1 Oracle timeline

Exhibit 1 presents important events that occur on Oracle Systems Corporation beginning 1979 until 1991. For the first seven years after company establish, Oracle state increases in annual sales growth and net income. However, after four years their stock listed company experience decreases in stock price. Several question asked for the company as stated: Was the company healthy now in late September 1990? Had management made the right choices in running the company? Was management doing a good job? What represented the real source of value in this company? What happening in the company share price?

2.0 OBJECTIVES. The purposes of this studies are describe as below To evaluate the importance of the announcements. To identify company problems and suggested recommendation. o Cause and effect diagram (fishbone) o SWOT analysis To analyst the company financial health. o Financial ratio analysis

3.0 PROBLEMS. Exhibit 2 Cause and effect diagram (Fishbone)

Financial Management
Managers misconduct Unethical officers selling shares Decline product quality Miscalculated revenue recognition Increases in Account Receivable Overestimate future growth Sales representatives resign Increses in General and Administrative Expenses Drop in share price

Company Value
Lawsuits

Product

Workforce

Investors

There are five major problems as show in Exhibit 2 such management practices, financial condition, product, workforce and investors affect company value. 3.1 Management. The primary objective of management is stockholder wealth maximization by maximizing the price of the company common stock. According to agency theory, management should conduct the company for the best interest of their shareholder. Managers misconduct in the company affect the company value where the managers take wrong action in decision making. Based on insider information, six Oracle officers take advantages to allow them profit from selling 645,000 shares before the March 1990 earnings disclosure. In investors view, they see this is unethical practices by Oracle officers.

3.2 Financial. A lot of problems faces by Oracle are financial practices in the company. Based on auditors opinion some sales revenue cannot be recognized that give more impact to financial statements condition. The main issue here is the timing of revenue recognition. Oracle derives revenues from two primary sources, software licenses and services. Statement of Position No. 97-2, Software Revenue Recognition, issued by the American Institute of Certified Public Accountants (SOP 97-2) classify Oracle software package their products in bundles of more than one product or service with multiple deliverables that are sold a lump-sum contract price. Increases in account receivable give picture that Oracle have a large credit sales. This current asset will reduce cash flows because the timing of cash flows where cash received early is better because it can be reinvested. There are too much expenses spend for general and administrative during quarter ended August 1990 that increasing in operating expenses larger than revenue generate negative operating income. Oracle actual revenue growth only 30 percent less than 50 percent as the company projected. Overestimate future growth on revenue give negative impact for investors that company cannot achieve their target. Oracle reduced projected growth from 50 percent to 25 percent. The company stock price drop because investors losing their confident to Oracle stock. 3.3 Product. Competition from others players in software market give consumers more alternative and preference in making decision to buy software for certain criteria likes product pricing, latest technology, multiple-platform operating ability, user friendly upgrades, and customer support. Oracle should concern some aspect of products and services produced and the production methods used especially in research and development methods.

3.4 Workforce.

It is not possible Oracle have higher sales representative turnover because every sales force need to fulfill and archive sales target requirement. For those sales force not meet sales target they will be fired immediately. Oracle practices extremely aggressive business strategy to control software market share from others competitors.
3.5 Investors.

After disclosures in March 1990, 20 lawsuits were filed by investors that believe company judgment based on false information and fraud to promise good return from investment.
4.0 FINANCIAL RATIOS. 4.1 PROFITABILITY RATIO

Exhibit 3 Profitability ratio

Profitability Ratio
40 35 30 25 (%) 20 15 10 5 0 1985 1986 1987 Year Operating profit margin (%) Return on total assets (%) Net profit margin (%) Return on equity (%) 1988 1989 1990 11.84 10.03 6.7 10.65 10.27 11.9 10.86 21.05 20.58 19.58 21.64 18.9 31.85 22.65 17.18 15.2 35.47 30.29 21.07 17.77 14.01

19.55 14.91 12.09

4.1.1 Return on Assets (ROA)

The decreasing of Oracle ROA to 14.91 percent in 1990 shows this company using higher debt to buy property, equipment, computer software development especially on financing new project that cost million dollars. The strategy made by Oracle System Corporation using the debt source for increase the firm value probably good choice, but the longer-term taken to build each project make this company suffer in short-term on generating profit on assets. As a result, will lower profit they have, it will make them trouble to pay debtholder. Moreover, it will give company bad reputation for future borrowing.
4.1.2 Return on Equity (ROE)

By measuring this ROE ratio, it saw the decrease that in year 1990 with 30.29 percent difference from previous year with 35.47 percent. This will provide bad image to shareholder that will cause them decide to invest in other company like IBM or Informix Corporation that give more benefit. The fact that returns on equity is higher than return on assets reflects from the use of financial leverage on Oracle. This becomes a concern when viewed with the increase in credit sales; although credit sales did boost sales in down times, it most likely Oracle has delayed its credit sales at the risk of increasing bad debt write-offs.
4.1.3 Net Profit Margin

Oracle able to generate net profit margin 12.09 percent in 1990 lower than last year with 14.01 percent. This cause company sufficiently has lower ability to manage condition like rising costs, fallings prices or declining sales in future. Even it shown losing, but on average it still in higher net profit margin compare with other company in same industry such as Ask Computer, Informix Corporation, BMC Software any many more.

4.2 EFFICIENCY RATIO 4.2.1 Days Sales Outstanding

Exhibit 4 Days sales outstanding

200 175 150 Day 100 50 0 1985 1986 1987 Year Days' sales outstanding 1988 1989 1990 142 181 176

168

164

For Oracle System Corporation, the total amount owing by debtors was $468,071 thousands at end of 31 May 1990. This amount of debtors was increase 78.66 percent more than it was the year before. So, it means this company given an additional $206,082 thousands worth of credits to their customers over the year. According to this ratio analysis it sees that days sales outstanding increase from 164 days in 1989 to 176 days in 1990. This increases of 12 days and have an additional $206,082 thousands worth credits shows that this company given a longer time to their customer to pay back outstanding debt. As an effect, company is having less holding money in hand. It will make Oracle less on expenses that they really need for increasing the quality of the product and it lower down their sales. This means Oracle System Corporation doesnt have greatly ability to continue generate profit in more competitive environment. Based on ratio analysis above, it shown that not good for company keep longer collection days with adds debtors thus will fewer holding money. But if we measure overall in detail, it see that the increases of trade

receivable in year 1990 with $206,082 thousands maybe because Oracle have added new client on their product which is ask for credit sales. It was prove by the rise in net income around 43.59 percent. In addition, earning per share also increase to $0.86 in 1990 compare with $0.61 last year. In the same way that stock control is a vital aspect of working capital management, same with debtors control. This company needs to sell their goods on credits, otherwise they might find it difficult to survive if competitors provide such credits facilities; this means losing customers to the opposition.
4.2.2 Inventory Turnover

Exhibit 5 Inventory turnover

80 69.97 60 40 20 0 1985 1986 1987 Year Inventory turnover 1988 1989 1990 23.14 20.59 21.34 22.84 18.9

By measuring inventory turnover, it saw the decrease in year 1990 with 18.90 times compare to previous year with 22.84 times. In fact, this inventory add 3 more days on inventory holding period that make it around 19 days keep in store consequently tell us that Oracle has much riskier of value loss. It signifies that this company experiences an inefficiently on managing and controlling their inventory. As a result, Oracle are worse competence to compete with other competitor that have enormous inventory turnover such as Borland International (290 times), Ask Computer (53.6 times), Computer Associates (49.16 times) and many other company. It means that Oracle more stock to

worry about, higher investment in stock that make their money tied up in the stock room. Moreover, they cant spend enough money for research and development expenses for publishing new design of DBMS and explore new branch or expand their market on Asian country. It will continue generate sales in future that make increase in profit and the efficiency of this company.
4.3 LIQUIDITY RATIO

Exhibit 6 Liquidity ratio

Liquidity Ratio
2.4 2.2 2 1.8 1.6 1.4 1.2 1 1985 1986 1987 Year Current ratio Quick ratio 1988 1989 1990 1.56 1.51 1.86 1.75 1.88 1.75 1.89 1.75 2.25 2.12 2.01 1.83

4.3.1 Current Ratio

Oracle System Corporation current ratio for year 1989 is 1.89 and it reached 2.01 in year 1990. This enlarge of 6.35 percent is signaling that this company going through the good condition incoming year. It more influencing by cash in company current asset $49,828 thousands that effect from using an extremely aggressive business strategy such as sell

aggressively, maintain technology and product leadership, diversify into related fields and expand internationally.
4.3.2 Quick Ratio

In year 1990, Oracle is more liquid with the 1.83 which is increases around 4.75 percent from earlier year. It simply tells this company not really depends on their inventory because more than half of current ratio is quick ratio. It especially important for insurers as major catastrophe can occurs such as a hurricane, earth quake or tsunami that would cause an immediate need for cash by the insurer to pay the amount of claims.
4.4 FINANCIAL LEVERAGE 4.4.1 Debt/Total Assets

Exhibit 7 Debt/Total assets

20 15 13.37 15.33 9.89 4.76 1985 1986 1987 Year Debt/Total assets (%) 1988 1989 1990 17.35 13.59

(%)

10 5 0

In 1990, Oracle System Corporation has high debt/total assets ratio with 17.35 percent compare with past year 13.59 percent. It indicates that company is highly leveraging that placing them at risk, especially in an increasing market interest rate. It can be verified by company buying property increase around 82 percent from $94,455 thousands in year 1989. As an addition, the computer software development also shown raise to $ 33,396 thousands compare to 1989 only with $13942 thousands. Oracle is in danger 9

position if creditors are bound to get worry of possibility the company is exposed to large amount of debt and they start demand repayment of debt.
4.4.2 Debt/Equity

Exhibit 8 Debt/Equity

0.4 0.3 0.2 0.1 0 1985 1986 1987 Year Debt/Equity 1988 1989 1990 0.28 0.31 0.17 0.09 0.35 0.27

A high debt to equity ratio with 0.35 times in 1990 compare to year before 0.27 times, shown when this company extensively increases using it debt sources around 74 percent. It generally means Oracle has aggressive in financing its growth with 51 percent debt whereas only 49 percent from equity source. Mainly, it can result in volatile earnings as consequences of the additional interest expense. The cost of this debt financing may outweigh the return that the company generates on the debt through investment and business activities and become too much for the company to handle. This in turn limits the amount of capital that can go to growing the business, research and development, or simply paying good dividends to shareholders. Since shareholders afraid of bankruptcy affect that would leave shareholders with nothing, six Oracle officers profited by selling 645,000 shares before March earnings disclosure.

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4.4.3 Times Interest Earned

Exhibit 9 Times interest earned

80 60 40 29.54 20 0 1985 1986 1987 Year Times interest earned 1988 1989 1990 17.46 11.08 55.81 58.94 45.29

For Oracle, the interest bill is only covered 11.08 times in year 1990 compare to 45.29 times compare to earlier year. This lower ratio indicates that this company lenders in a relatively unsecured position. So, it gives difficulty to meets its interest obligations from their profit. This shows that Oracle System Corporation had a worse problem with its interest obligation since the interest it earned was smaller than the interest it might have to pay.

5.0 RECOMMENDATIONS AND IDEAS. 5.1 Management and Marketing 5.1.1 Competitive Advantage

Many competitors surround DBMS industry. However, Oracle should take advantage over those competitors by offering consumers greater value of the product either through lower prices or by providing more benefits that justify higher prices.

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5.1.2 Be Realistic

Oracle should set their budget at a level management thinks the company can afford. In addition, companys goal and growth need to be realistic and sustainable. Management approach should also develop strategies that can sustain the company environment and produce profit to the company. This can be done as marketing researches gather preliminary information that will help identify possible problems and suggest hypothesis.
5.1.3 Segmentation

It is good that Oracle aggressively expanded its range of products. However, it is best for Oracle to divide its target market into groups based on customers needs, knowledge, attitude, use or response towards a product. Of course, there are various types of users demanding DBMS for the use of government sectors, students, entrepreneurs and many others. By dividing this group needs, it will benefit the users itself. This will lead to customer satisfaction as the product value matches the buyers expectation.
5.1.4 Focus Group Interviewing

The purpose of this interview session is to interview a few people that represent others to talk about Oracle organization, its software and services. This is to identify relevant strengths, weaknesses, opportunities and threats (SWOT) that can benefit or plunge Oracle. For every data gathered, follow-up procedures should be done to ensure satisfaction as Oracle business runs.

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5.2 Accounting 5.2.1 Independent Review

After one person has process a transaction, a second person in the company need to review the work of the first person. This second person checks for proper authorization signature, review supporting document and check the accuracy of crucial data item.
5.2.2 Assign External Auditor

Independent outsiders that have the authorization to fully view a company business transaction are known as external auditors. As they have no relation and personal interest towards Oracle, they must run periodic examination of the company environment, objective, strategies and activities to determine problem areas and opportunities. In addition, they can recommend a plan of action to improve the company performances. This can be a control tool for measuring and evaluating the result of marketing and management strategies and plans and taking corrective action to ensure objective are achieved.
5.2.3 Change Revenue Recognition Method

Oracle revenue is recognized as software contracts were sold on trial basis and this is not accurate revenue recognition. This is because; Oracles auditor has opined some of these sales are never actually realized. Revenue should only be recognized when there is a fair certainty that the transaction is completed with revenue has been generated, such as recognition the revenue after shipment of order or receipt of cash.

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Exhibit 10 Summary of recommendations Problem Management Solution Department restructuring that merge finance department with corporate finance department. Financial Product Workforce Fired several managers. Follow strict accounting standards. Reduced projected future growth from 50% to 25%. To emphasize profitability and product quality. Lay off 10% domestic workforce (about 400 persons). Investors Company denied any wrongdoing, fraud and misrepresentation.

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