Taking Stock: Uncertainty Spells Trouble For Oracle
Oracle's February sales may bode ill for other application vendors
Investors may remember March 18 as the day before the war with Iraq started, but it also coincided with Oracle's fiscal third-quarter earnings report, ending Feb. 28. It's the luck of the draw that the company had the misfortune to report while everyone was paying attention to larger global issues.
Even though macro issues slowed sales, Oracle was actually able to report earnings per share of 11 cents, slightly higher than Wall Street consensus of 10 cents. The quarter started out strong, but February sales fell off a cliff as the war drums started beating. As you would expect, it's hard for IT managers to make sound business and purchase decisions when they have no idea what their business might look like next month. Postponing purchases became standard business practice in February, and March may be very much the same. Oracle's revenue was $2.3 billion, up 2% year over year and flat sequentially. Though the revenue growth was positive, led by strong product-support revenue, it was boosted substantially by currency. Currency had a positive 5% impact on revenue growth. Therefore, if the +5% currency impact was backed out of total revenue growth, the top-line growth rate was actually a decline of 3% year over year.
However, license revenue declined more than 4% year over year despite the benefit of positive currency impact. Most of the drop in revenue can be attributed to fewer large license deals (ones worth more than $5 million). Application revenue, which tends to be a more discretionary IT purchase, was down more than 5% year over year. Meanwhile, database license revenue fell a little more than 4% year over year. Also, consulting revenue declined by 6% on the same basis because of competition from lower-priced offshore companies. On the positive side, license updates and product support grew by 16% year over year. Remember, 22% of new license revenue is basically an annuity for the company (15% is upgrades and 7% is support). The financial story during this downturn in IT spending has been Oracle's ability to upgrade licenses and drive maintenance fees for its customers. Interestingly, despite being one of the leading database companies, Oracle has started doing a better job of tracking renewals through a more comprehensive customer database. With emphasis on tight cost controls, the company has been able to maintain operating margins of 34.5% in the third quarter, flat with the previous quarter.
The uncertainty has led to a much wider range of forecasts for the company's fiscal fourth quarter. New license revenue may grow from -15% to +5%, a potential 20% range. Fourth-quarter revenue growth range is projected from -6% to 2%, a more modest spread of 8% compared with the license revenue growth range. Again, the lower overall revenue range is supported by the stable product-support revenue. Forecasted earnings per share will be 12 to 15 cents with the hope that it will be in the upper half or in line with the current Wall Street consensus of 14 cents.
Unfortunately, Oracle's February sales offer an ill omen for other leading application software companies such as PeopleSoft Inc. and Siebel Systems Inc., despite those companies' strong calendar fourth-quarter revenues and earnings. Smith Barney's CIO IT survey already forecasts a 2.5% decline in IT spending for the first half of the year, so any further sales weakness is only going to make it more difficult for these companies. As usual, be cautious of stock valuations at current levels; they already assume a recovery.
William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at firstname.lastname@example.org.
5 Top Federal Initiatives For 2015As InformationWeek Government readers were busy firming up their fiscal year 2015 budgets, we asked them to rate more than 30 IT initiatives in terms of importance and current leadership focus. No surprise, among more than 30 options, security is No. 1. After that, things get less predictable.
Top IT Trends to Watch in Financial ServicesIT pros at banks, investment houses, insurance companies, and other financial services organizations are focused on a range of issues, from peer-to-peer lending to cybersecurity to performance, agility, and compliance. It all matters.
Join us for a roundup of the top stories on InformationWeek.com for the week of October 9, 2016. We'll be talking with the InformationWeek.com editors and correspondents who brought you the top stories of the week to get the "story behind the story."