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In re Oracle Corp. Derivative Litigation11/24/2004
not short by much. Moreover, a Pipeline Report came out the same day. Although the Pipeline growth was down to 32% from the prior January 15 Pipeline Report, the Pipeline was sufficient that, if converted at the 3Q 00 rate, Oracle would still have exceeded the Market Estimates.
The January Flash Report reported the actual results for the first two months of the quarter. Again, the plaintiffs want to look at that Report as if Covisint did not exist. But it did. With Covisint, Oracle had achieved 33% of the license revenue needed to meet the Market Estimate. In 3Q 00, Oracle produced 67% of its revenue in the third month. If Oracle did the same in 3Q 01, its first two month results were sufficient to enable it to meet the Market Estimates. And if Oracle produced at a lower level in the third month - such as 64.5%, the average of the last two years' performance in the last month of a third quarter - Oracle would have reached 97.5% of the Market Estimates, hardly a material shortfall. Even assuming that Ellison had digested the January results before they were actually provided to him - an assumption for which there is no rational basis - the January Flash Report does not support an inference of materiality. This is especially so when the very next Best Estimate - created on February 12, 2001 - increased, projecting Oracle would earn 11.58 cents and produce $1.265 billion in License Revenue - figures that meet the Market Estimate as to earnings and, with a 21% forecasted increase in license revenue, would arguably fall within the range implied by "about 25%," and certainly would not miss it materially.
What happened in the rest of the quarter is quite telling. Minton's Best Estimate on February 26 had become more pessimistic, projecting earnings of 11.19 cents and license revenue of $1.257 billion. These figures fell short of the Market Estimates but not by a material amount as to earnings (less than a full penny) and not drastically as to license revenue growth (20% as compared to "about 25%").
In the few days that remained in the quarter, however, the bottom fell out. As discussed previously, Oracle's sales units drastically reduced their estimates, as prospective customers deferred spending decisions because of a softening economy. The e-mail communications and other evidence of angst over this at the sales units is unrebuttedly unfeigned. Within a day or so, Minton had to reduce her estimate down to 10.07 cents based on a correspondingly dramatic reduction in estimated license revenue. Even with that reduction, Oracle would have a record quarter but would fall materially short of the Market Estimates. But no rational person could infer from this record that Oracle could have or did predict this seismic shift in its quarterly fortunes. Given the historically conservative approach of the Oracle sales units and Minton to projecting performance, it is implausible that either source of information wished to sandbag top management. The sales units' apologetic communications reflect their embarrassment at their failure to foresee the last-minute erosion.
The unprecedented nature of what happened is highlighted by Oracle's plummeting Pipeline Conversion Rate for 3Q 01 - which ultimately came in at levels well below any Oracle had recently experienced. Had Oracle converted the Pipeline as estimated in early February even at the 2Q 01 rate the plaintiffs suggest - as opposed to the 3Q 00 rate that Oracle executives actually focused on - then Oracle would have been within range of the Market Estimates.
In the end, the plaintiffs ask me to adopt a Monday-morning quarterback approach to materiality. Because 3Q 01 went bad, it must have been reasonably foreseeable at th
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