Oracle's Slow Sales Raise Doubts On Tech Spending

Investor's Business Daily

Oracle late Wednesday reported better-than-expected earnings, but sales and guidance were light. That may be a bad sign for corporate IT spending — or that the business software giant has its own problems.

The enterprise software maker giant earned 59 cents a share excluding various items in its fiscal first quarter, up 11% vs. a year earlier. Analysts polled by Thomson Reuters had expected 56 cents.

Adjusted revenue grew 2% to $8.38 billion, slightly below Wall Street forecasts for $8.47 billion. Revenue has been stuck in a range of -2% to +3% for eight straight quarters.

And that may not change. Oracle sees Q2 revenue up 1%-4%, suggesting it may miss forecasts for a 3.2% gain to $8.4 billion. It predicted EPS of 64-69 cents vs. analysts' target for an 8% rise to 69 cents.

"It speaks to Oracle's challenges as they look to reaccelerate growth in the move to the cloud and fix execution missteps seen over the last few quarters, said Daniel Ives, an analyst for FBR Capital Markets.

Oracle shares fell 3% in late trading after rising nearly 2% to 33.87 during the regular session.

Global IT spending is expected to rise 2% this year, with enterprise software revenue up 6.4%, says market tracker Gartner.

Oracle is scrambling to keep up with changing demands of its customers, many of which are signing up with smaller cloud-based software-as-a-service (SaaS) subscriptions vs traditional installed licenses. Oracle has made several cloud-related acquisitions in the past two years. They include Taleo, a talent management software maker, for $1.9 billion; RightNow Technologies, a customer service software firm, for $1.5 billion; and Eloqua, which makes sales and marketing analysis software, for $871 million.

Oracle's core database software is competing with open-source alternatives while its line of hardware server systems struggles for growth in a declining market.

Revenue from new software licenses and cloud software subscriptions grew 5% to $1.65 billion, just edging past views.

Software license revenue is the key for investors in determining Oracle's health and customer demand, said Ives.

Q1 software revenue grew 6% to $6 billion vs. the same quarter last year. Software license updates and product support revenue increased 7% to $4.43 billion.

A confluence of factors has created a tough environment for Oracle, said Michael Turits, an analyst for Raymond James.

"You have the macro, a shift in buying behavior in applications toward SaaS and Oracle is only getting going with its SaaS and cloud offering for applications, and on the database side people are looking at alternatives," he said. "There is a lot of stuff going on keeping it from being a demand for Oracle products right now.

At the close of its Q4, Oracle said it could see hardware growth in Q1. But that didn't happen. Hardware systems revenues fell 7% to $1.26 billion vs. a year earlier.

Hardware head winds remain fierce. Q2 industry server revenues fell 6.2% vs. a year earlier to $11.9 billion.

Oracle could post positive hardware sales in Q2 by taking share from rivals, said Steve Koenig, an analyst for Wedbush Securities.

"The server market is not a real healthy market, so it's gaining share against competitors in the high-end, which is IBM (IBM) and Hewlett-Packard (HPQ)," he said.

In July Oracle entered strategic partnerships with Microsoft (MSFT) and Salesforce.com (CRM) .

"That could help get greater distribution for Oracle software," Turits noted.

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