Investors Applaud Oracle’s Non-GAAP Earnings

The Sarbanes-Oxley (SOX) Act of 2002 was supposed to protect investors by stopping the artificial inflation of financial statements by public companies in the U.S. Why then are investors cheering Oracle Corp.’s fourth-quarter results, which were artificially inflated by the acquisition of rival PeopleSoft?

“We love Oracle as a company,” Mark Hillman, president of Hillman Capital Management of Annapolis, MD, is quoted in MarketWatch. “We believe they have a sustainable competitive advantage, and PeopleSoft will help them with that.”

MarketWatch reports that Oracle is one of 45 firms in the portfolio held by Hillman’s firm although the firm is not presently buying Oracle stock.

SOX Regulation G, which went into effect in March 2003, defines non-GAAP (Generally Accepted Accounting Principles) financial measures and creates disclosure standards for them. According to Strategic Finance magazine, the guidelines for non-GAAP financial measures stipulate that they may not:

  • Be given prominence over GAAP numbers
  • Exclude any charges or liabilities requiring cash settlement from non-GAAP liquidity measures
  • Be inserted into GAAP financial statements or accompanying notes.

It should be noted that the June 29 announcement of fiscal 2005 Q4 GAAP and non-GAAP earnings, revenues and net income appears to adhere to all the SOX guidelines. Also, Oracle’s statements provide more detail than most company reports according to MarketWatch.

“The rapid integration of PeopleSoft into our business contributed to the strong growth in both applications sales and profits that we saw in the quarter,” Oracle President Safra Catz said in a written statement. “The combination of increased organic growth plus a carefully targeted acquisition strategy have pushed Oracle’s revenue and profits to record levels.”

In discussions with financial and investment analysts, whose advice many investors rely on when making decisions about their investment portfolios, MarketWatch reports Oracle dealt exclusively with non-GAAP figures.

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