Performance Monitor - October 2005

Oracle CEO Larry Ellison is a master in the art of persuading investors that they should accept his offer for shares in their company. Having devoured PeopleSoft, he now has the muscle to take on market leader SAP with supreme confidence.

However, there is one group of individuals who are immune from Ellison's mixture of bullying and charm. Any perceived failure by Oracle to perform less well than they believe possible, unleashes bitter criticisms of Ellison's efforts. But he cannot do without them. He needs them on side. They are the Wall Street analysts.

On the face of it, Oracle had a reasonable first quarter. Net income dented by write-offs from acquisitions rose 1.9% to $519m on revenue 25% higher at $2.76bn. But this was not as good as Wall Street had expected and there was particular concern that sales of its database software were only 1% higher at $492m, although Oracle said the comparison was with a strong period.

Oracle preferred to brag about its Fusion Middleware, saying that new licence sales grew 33% in the quarter and 26% over the last year while Ellison said BEA's middleware licence sales declined over the last year. "We are optimistic about becoming number one in the middleware business," he said.

Oracle's first quarter is an uncertain guide to the year and investment opinion could swing wildly the other way if the company produces better than expected results as it integrates the PeopleSoft and Siebel businesses.

One of the most spectacular performances of the quarter came from storage vendor McData where revenue took a temporary dive to a loss of $25.5m but turnover leapt 68.3% to $165.3m, largely as a result of its acquisition of CNT.

McData has been vulnerable because its biggest OEM customer is EMC, which before the CNT acquisition accounted for about half of McData's revenue. Nice assured revenue when you can get it but it left the company extremely vulnerable. This year, for example, EMC has been taking a very long time to qualify and begin selling McData's latest flagship director.

The CNT merger means McData now only relies on EMC for about a quarter of its revenue.

The same can also be said of CSR, which saw a 61% increase in second-quarter revenue to $94.8m with a 50% share of the booming Bluetooth market the reason for its performance. Net profit grew modestly to $15.1m.

The strength of demand, particularly in the mobile phone and headsets market, has taken the company by surprise and it has just forecast that third-quarter revenue will be $155m to $160m, double last year's level and well above the $125m to $135m it forecast in July.

While it is now riding the crest of the Bluetooth wave, the real test of CSR will be whether it can repeat the trick on new emerging standards. It now plans to revolutionise the WLAN market by bringing it to smaller, portable devices.

Adobe Systems is still performing well, with net profit in its third quarter up 38.6% to $144.9m, on a 20.6% increase in turnover to $487m. The results pleased the markets because it is traditionally a weak quarter and Adobe attributed the good performance to strong demand for its Photoshop and Illustrator design software programs.

The results come at a good time for the company as it is about to complete its $3.4bn acquisition of Macromedia. The two companies believe that by combining Adobe's document creation and collaboration software with Macromedia's web design and animation tools they can create a software powerhouse set to grow faster than the industry as a whole.

Only one company can spoil the party as the two unite: Microsoft. It has just shown software developers a graphics programming tool, formerly code-named Avalon, which could potentially threaten Adobe and Macromedia.

Palm, which created the PDA market, is a company that has suffered at the hands of Microsoft, which could not stand the thought of millions of people using an operating system other than Windows. It has also suffered in the face of progress as people are unwilling to have a PDA in one pocket and a phone in the other and are demanding a converged device in the shape of a smartphone, a trend that Palm picked up rather too late.

Although revenue was up 25.3% to $342.2m, net income was down 7.1% to $18.2m. Palm needs a boost to its performance and it was no surprise when it announced it would use the Windows Mobile 5.0 operating system in a Treo device that will be sold by Verizon Wireless.

Palm's adoption of Windows was pretty well certain after it hived off software arm Palmsource, which was looking to use a Linux kernel, and was taken over by browser and content delivery software developer Access. Palm's OS will be with us for some time to come but anyone who assumes there is space between Windows and Linux is in for a hard time financially.