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Business Readings
Reprinted by permission of Dow Jones, Inc. via Copyright Clearance Center, Inc. Copyright © 1997 Dow Jones and Company, Inc. All Rights Reserved Worldwide. On an interstate highway a few miles north of its offices, Informix Corp. has erected a new broadside against its biggest rival, Oracle Corp. A billboard warns drivers passing Oracle’s nearby office towers that they are in a "Dinosaur Crossing." Following a grim earnings announcement yesterday, Phillip E. White, Informix’s chairman and chief executive officer, must prove that his own company isn’t headed for extinction. The major database-software maker is reeling from what critics assert were two classic management mistakes: overly aggressive accounting practices and a huge bet on a market before its time. Informix first stunned Wall Street on April 1, saying its first-quarter sales trailed analysts’ projections by about $100 million, or 40%. Yesterday, Informix reported a first-quarter loss of $140.1 million, or 93 cents a share, compared with year-earlier profit of $15.9 million, or 10 cents a share. Sales sank 34% to $133.7 million from $204.1 million. The stock has been crushed, falling 52% since its April 1 disclosure, to close at $7.25 a share, down 6.25 cents, yesterday in trading on the Nasdaq Stock Market. Informix added another negative surprise yesterday: Alan Henricks, chief financial officer, has resigned after just three months on the job. He declined to comment, but former Informix executives say he favored a more conservative approach than Mr. White on some accounting matters. Mr. White linked the resignation to personal reasons he wouldn’t identify, not policy differences between the two men. The departure comes at an awkward time: Informix faces a credibility problem among some analysts because of the way it recognizes revenue from computer makers and other companies that resell its software. In April, Informix disclosed that about $170 million of its software sales in 1996 were to partners that hadn’t resold most of the software yet, including about $55 million in transactions in which computer makers agreed to buy Informix software in about the same dollar amount as hardware Informix bought from them. Critics say the large volume of unsold inventory, and what they regard as "barter" transactions, tend to mask true demand for Informix’s products. "In my opinion, the revenue-recognition issue is a dark cloud over the company," says David Readerman, an analyst at Montgomery Securities. Mr. White, a 54-year-old veteran known for his prowess as a salesman, says the sales practices were properly disclosed and comply with accounting rules. Several independent experts agree. Indeed, most of Informix’s problems can be traced to a mistake that is much more common among high-technology companies: committing too early to a new technology. Blinded by the potential of a new multimedia database, Mr. White says, the company bobbled the marketing of conventional programs that bring in almost all of its revenue. He also restructured the company’s sales force in Europe at an inopportune time, contributing to a drop in sales of its conventional databases. "I feel terrible about it," says Mr. White of Informix’s predicament. "I feel like I disappointed employees, customers, friends and family." Informix had posted $939.4 million in sales last year and seemed a lock to become the next billion-dollar software company. Analysts said the new multimedia database called universal server provided a technical lead of as long as two years. "I know most of the people in the database area, and there is no management team of higher integrity than those at Informix," says Thomas Siebel, chief executive officer of the San Mateo, Calif. software company Siebel Systems Inc. Mr. White, a celebrated deal maker, has used a series of imaginative tactics to battle hyperaggressive Oracle. When Informix landed Hyatt Hotels Corp., for example, Mr. White says he pledged to hold regular company meetings with the hotel chain. He tries to favor the long-distance service of MCI Communications Corp., another key Informix customer. "I’ve got a philosophy—I want to use the products of customers who use my products," Mr. White says. To counter Oracle’s huge sales force, Mr. White last year pushed for new partnerships with computer makers and other software companies to exploit their sales muscle. The deals, with companies including Hewlett-Packard Co., Sequent Computer Systems Inc. and Baan Co., included prepaid licensing arrangements in which the companies commit to buying Informix software they will resell later. Meanwhile, Informix planned to set up 30 centers dubbed "superstores" that will allow customers to demonstrate its software on several of the latest computer systems. The company couldn’t afford to buy all the hardware, so it opted for deals in which the hardware makers licensed equivalent amounts of Informix software for resale. Accounting rules allow companies to recognize revenue from such transactions, as long as they represent irrevocable commitments by the buyers. Mr. White adds that the advance deals tend to lock Oracle out of future sales. Analysts, including Andrew Roskill of Smith Barney, argue that a more conservative approach would give a better idea of Informix’s real growth rate. Oracle, by contrast, recognizes revenues only when its software has sold through to end users. Mr. White says he erred when he stopped marketing Informix’s mainstream databases by publicizing performance tests. Sales representatives, many of them new to the company, were galvanized to promote the new universal server program for future applications such as publishing multimedia content on the Web. "I still think content is important, but not as important as we thought it was," he says. Hoping to return to profitability by the fourth quarter, Mr. White is ordering management changes and cost reductions, reducing superstores to 14 or so this year. He expects to take unspecified write-offs in the second period, in addition to $37.5 million in acquisition-related charges in the first period, and refute six shareholder suits alleging securities-law violations. "I’m going to fight those lawsuits until hell freezes over," he says. Discussion Questions
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