Oracle's poor form spells trouble ahead

Jim Finkle | Dec 21, 2011 2:40 PM
Plenty of concern among customers.

Oracle's profit missed Wall Street's forecasts for the first time in a decade after new software sales sputtered, hammering its shares and stoking fears that a global economic slowdown is hurting tech spending.

Shares in the world's third largest software maker plunged more than 10 percent after executives also unveiled weak sales projections for the current, fiscal third quarter.

The company posted an unexpected sequential decline in the revenue it gets for providing maintenance on its software products -- one of the most lucrative parts of its business.

That hasn't happened since the fall of 2008, when the financial crisis began with the collapse of Lehman Brothers, said Cowen & Co analyst Peter Goldmacher.

Analysts warned that Oracle's dismal fiscal second-quarter results boded ill for industry peers. SAP AG's U.S. stock was down five percent, while Salesforce.com was off two percent in after-hours trading.

"Tech spending is more under pressure than people thought," Goldmacher said. "IT budgets have been relatively flat, when you have issues like you do in Europe, people naturally pull back."

Oracle was among the first major technology companies to report results spanning November, offering the latest snapshot of the state of worldwide IT spending. Some analysts said its disastrous showing presaged weaker results from the industry.

"Every technology company is going to get hit. This is just the start," said Global Equities Research analyst Trip Chowdhry.

ILL WINDS

Signs are emerging of a widening global economic slowdown as Europe, which experts say is headed into a recession, gropes for a solution to its over-indebtedness.

Oracle has heavy exposure to the region. New software sales rose two percent from a year earlier to US$2 billion during the quarter. Analysts, on average, were expecting new software sales of US$2.2 billion, according to StreetAccount.

For the current, fiscal third quarter, Oracle projected new software sales growth of zero to 10 percent, lagging an average forecast for about seven percent growth, according to StreetAccount.

The company also reported that hardware product sales fell 14 percent to US$953 million, below the average Street account forecast of US$1.06 billion. On Tuesday, Oracle executives told analysts on a conference call that it expected hard revenue declines of between five and 15 percent. StreetAccount had compiled an average forecast of a dip of 0.5 percent.

Oracle's software maintenance revenue fell to US$3.99 billion during the second quarter from US$4.02 billion in the first quarter.

The company's shares fell to US$26.15 in extended trade from their Nasdaq close of US$29.17.

Here are several key areas where the world's No. 3 software maker fell short:

  • EPS: Oracle posted Q2 non-GAAP profit of 54 cents per share, missing the average analyst forecast of 57 cents, according to Thomson Reuters I/B/E/S. The last profit miss for Oracle was back in the February quarter of 2001, when it missed by two cents, according to Thomson Reuters I/B/E/S.
  • Software: new software license revenues are probably Oracle's most closely watched metric, because it indicates future revenue streams. The company pulled in Q2 new software license revenue of US$2 billion, missing the Wall Street consensus of US$2.2 billion, according to research firm StreetAccount.
  • Computer equipment: Wall Street is keeping an eye on Oracle's flagging hardware division, which it took on after buying Sun Microsystems. Hardware systems product revenue fell to US$953 million, missing the US$1.06 billion forecast of analysts polled by StreetAccount. Analysts had expected Oracle to be able to stem declining revenue and turn it around by fiscal 2013.
  • Services: Revenue from software updates and support unexpectedly declined from Q1 to Q2, dropping nearly 1 percent to US$3.99 billion. It was the first sequential decline in three years. The division is one of the most lucrative parts of the company.
  • Geographically speaking: Europe, Middle East & Africa revenue grew an anemic 0.7 percent to US$2.76 billion. Revenue grew about two percent in the Americas and eight percent in Asia Pacific.

(Additional reporting by Nicola Leske in New York and Poornima Gupta in San Francisco; Editing by Edwin Chan and Richard Chang)