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Oracle's Bad Quarter: IT Spending Sign, Or Fusion Confusion?

Oracle sales shortfall has Wall Street speculating whether it's an isolated problem or indicative of tighter 2012 IT spending.

New license sales are always an important indication of the health of a software company. And if it's a blue chip vendor, this stat also can be an indicator for the entire IT industry. So is it one or both in the case of Oracle, which recently reported quarterly financial results that were well short of expectations?

In case you missed the details during the busy holiday season, Oracle's core software sales for its fiscal second quarter ended Nov. 30 were up just 2% compared with the year-earlier quarter, whereas analysts expected at least a 7% increase. Oracle said IT budgets are stable but that purchases are being delayed by new internal approval requirements.

Many on Wall Street took Oracle's results as a sign that enterprise IT buyers might be pulling back, nervous about global economic conditions, particularly the debt crisis in Europe. Two weeks later, debate about the tech outlook is still raging, and it's infecting other stocks. On Wednesday, for example, Informatica's stock price declined more than 5% after an equities analyst wrote that the data integration company might experience the same sort of delays on major deals that Oracle reported.

[ What are your IT plans for the new year? Are these 12 Enterprise IT Resolutions For 2012 on your list? ]

Others think Oracle's troubles are more specific to Oracle. On Tuesday, for instance, quoted Nomura equities analyst Rick Sherlund as saying that Oracle's shortfall in new software license revenue "didn't make sense," so he checked in with other industry sources over the holidays.

"We do not expect SAP to pull an Oracle," Sherlund said, referring to SAP's upcoming Q4 report. "We have been hearing good things about SAP's quarter... [and] we like SAP even in the wake of the Oracle quarter."

Oracle may be suffering from confusion around its Fusion application offerings, according to Sherlund. Released in mid-2011 but not heavily promoted, the Fusion suite is the company's long-term, cloud-deliverable replacement for Oracle E-Business Suite, PeopleSoft and JD Edwards ERP systems, and Oracle and Siebel CRM systems. Yet Oracle has continued an Applications Unlimited program that promises long-term support and ongoing software upgrades for the legacy apps.

"Contacts tell us that Fusion may be freezing Oracle out of the final stages of some apps deals as customers resist buying the old product but are not convinced the new Fusion suite is ready for prime time," Sherlund said.

In fact, Oracle has sent mixed messages to enterprise software buyers by extending its Premier Support option on existing Oracle E-Business Suite (EBS) deployments. Premier Support typically ends five years after a product's initial release, at which point customers are offered only Extended Support, which entails higher fees. Oracle announced in October that it would extend Premier Support on EBS Version 12.1 by one year, and in November it extended Premier Support on EBS Version 11.5.10 by three years.

"The move to Extended Support is really designed to get people to stay current and have them experience better support by being on a newer release," said Mark Clark, president of OAUG (the Oracle Applications Users Group), in a recent interview with InformationWeek.

OAUG lobbied Oracle to extend Premier Support, Clark said, because many companies are still struggling in the sluggish economy. "For some organizations, the difference between Premier and Extended support can really add up," Clark said, adding that one large organization told OAUG it would save $500,000 per year for several years thanks to the extensions.

A $500,000 increase in support costs would undoubtedly be a powerful incentive to consider a software upgrade. And if an Oracle customer was to go to that trouble, it might also consider the Fusion alternative. But where EBS-to-Fusion upgrades are concerned, Oracle will now have to rely on more carrots rather than the stick of higher support fees. That is if Oracle wants to rely more on new software licenses, which accounted for 23% of revenue in the last quarter, rather than maintenance and support, which accounted for a whopping 43% of the company's revenue.

Another sign that Oracle's shortfall was isolated was competitor Infor's Tuesday report that its software license sales increased 17% over the 12 months ended Nov. 30. What's more, Infor, the No. 3 ERP vendor after SAP and Oracle, reported that its organic software license revenue grew 16% during those three months (the firm's second fiscal quarter) compared with the year-earlier quarter. That increase contrasts with a 2% decline in new application software license revenues at Oracle during the same three-month period.

The jury may still be out on whether Oracle's bad quarter says more about Oracle than it does the IT industry in general, but it's pretty clear that Oracle needs to work on its apps strategy.

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