Database companies tend to make the news for all the wrong reasons these days. Informix is struggling to recover from the effects of its ‘optimistic’ revenue recognition policy, star performer Oracle is suddenly facing a cloudy future and now, as Gary Flood reports, Sybase has troubles with its operation in Japan.
What a forty-ninth birthday present for Sybase Inc’s chairman and chief executive officer Mitch Kertzman: to have to host an emergency teleconference on Wednesday afternoon to explain how five misguided individuals in his Sybase KK subsidiary in Japan had derailed the recovery Kertzman has been painstakingly building for the past eighteen months. In what Kertzman, clearly at times white hot with anger, described during the conference call as a clear violation of Sybase’s conservative revenue recognition policies, the president of Sybase Japan and four of his managers cut deals with customers involving so-called side letters, a secret adjunct to a deal whereby a customer has a get-out clause from the ostensible sale. In other words, between $60m and $65m of what Sybase HQ thought were real sales weren’t, given that in effect the company was actually inadvertently lending its products to customers, not making any final sales.
Lied to auditors
The crisis was brought to light because of puzzling amounts in a cash account that was opened in the last days of the third quarter by Sybase accountants Ernst & Young. To mark how seriously Sybase global management is taking the issue, Kertzman has dispatched the company’s president and chief operating officer (since July last) John Chen to Tokyo with other senior executives; the five individuals have either been terminated or have resigned, with the company actively exploring taking further legal action against them so far as Japanese law allows. They lied to our auditors and our management, said Kertzman. This is very disappointing, very unfortunate, and it is really maddening, personally speaking, to see 5,000 other employees in Sybase around the world getting up every morning and doing the right thing, while these five didn’t. This group in Japan didn’t have to do this, and there is no question of any failure in communication – this is not a cultural or a language issue – this is simply completely unacceptable behavior and a failure of judgment on the part of these five individuals. In conclusion, Kertzman announced he was angry but in no way bowed as a result of the problem, which will, in effect, wipe out much of the progress Sybase made in general in 1997. This must be particularly galling as one of the things Kertzman has taken pride in during his eighteen month watch (he replaced Mark Hoffman as chief executive officer in July 1996) has been tight control of costs and expense management in general. For its last full fiscal year, reported in January 1997, the Emeryville, California database, tools and middleware provider showed a net loss of $79.0m, which included a $49.2m restructuring charge for its 1996 third quarter, up from the previous year’s net loss of $19.5m, on sales a fraction up (5.7%), from $956.6m, to just crack the billion dollar barrier, at $1.01bn. In the successive three quarters, however, Sybase how consistently shown profit, albeit on slightly softening revenues, with services tending to plug the gap in weakened core software product sales. In its first quarter, it made sales of $241.9m, slightly down from $243.7m the previous period, but with net profit of $2.5m compared to a loss of $6.9m in 1996; in its second, sales were down 4.9% to $237.6m, but it again showed net profit, this time of $4.4m, well up from losses of $24.6m the previous period; and for its third, though sales again were down, by 2.4% to $244.2m, once more it showed net profit of $5.2m, compared to a loss of $52.6m in the previous period. For the company’s nine month mark, it was showing overall net profit of $13.1m, on revenue down 2.7% to $723.7m, compared to a loss of $84.1m last time. During the course of 1997, apart from making money for a change, Sybase also managed the debut of its well-regarded Powersoft Jaguar CTS (component transaction server) and its Adaptive Component Architecture and Adaptive Server (effectively the 11.5 release of the Sybase relational database management system) in April.
Sad sack list
Now the company will lose money overall for 1997, joining a sad sack list of database companies (Oracle Corp and Informix Software Inc) who all seem to either suffer from over-optimistic Asian business forecasts or seemingly deep-rooted ambiguities about how revenue is recognized. And while it might be unfair to bracket Sybase with these guys, from the point of view of the investor, one has to wonder how trustworthy a relational database company ultimately proves to be these days. Maybe it’s time to throttle back on all the testosterone and worry more about the shareholder than what the guy down the highway is up to? Sybase says it has postponed announcing its figures for one week, and will now report on January 28th. Japan represents 22% of the company’s profit.
