Oracle's Earnings: Summer Doldrums Set In

Oracle's (ORCL) Sept. 16 report of weaker-than-expected fiscal first-quarter sales signals that companies aren't rushing to spend on technology, even as the U.S. begins to emerge from the recession.

The maker of database software said revenue for the quarter ended Aug. 31 fell 5%, to $5.05 billion, while net income rose 4%, to $1.1 billion. Excluding certain one-time items, earnings were 30¢ a share, matching Wall Street analysts' average estimate. A year ago, Oracle reported $5.33 billion in sales and earned 29¢ a share.

Analysts had expected Oracle to book $5.2 billion in sales. Combined with concerns that Oracle may hit snags in its attempt to purchase Sun Microsystems (JAVA), disappointment over the figures fueled a slump in Oracle stock, which slid about 2% in extended trading after the results were released. Oracle had closed down 53¢, or 2.3%, at 22.13 before the report. The stock had been on a roll, closing at a 52-week high of 22.86 on Sept. 11. "Just because people are starting to feel better about the economy doesn't mean they're ready to spend money on software," says Patrick Walravens, an analyst at JMP Securities (JMP) who has a market perform rating on Oracle's stock. Complicating matters, "the Sun acquisition has got to be a distraction," he says.

European Antitrust Concerns On Sept. 3, the European Union launched an antitrust probe to determine whether Oracle would gain too much control of the database market as a result of its proposed $7.4 billion acquisition of Sun. The EU has until January to decide whether to approve, block, or give a conditional green light to the deal. Oracle would likely be able to spin off Sun's MySQL open-source database to avoid derailing the buyout. Yet, the danger of a delay for Oracle is that "the longer [the closing process] wears on, the more Sun's business deteriorates, and the more market share IBM and Hewlett-Packard take away," Walravens says.

Sun, which makes computer systems and software including the Java programming language, on Aug. 28 reported a $147 million loss and a 31% drop in sales. Competitors are angling for Sun's customers. Hewlett-Packard (HPQ) has said it signed deals with more than 100 Sun customers between February and July. IBM (IBM) claims it has moved 250 customers from Sun to its own computer systems since January, and is adding about two accounts a week, says Inna Kuznetsova, IBM's director of Linux strategy.

Oracle is hitting back. By buying Sun, it plans to expand its stable of database, middleware, and business applications to include computer hardware. On Sept. 15, Oracle announced a new computer system called Exadata Version 2 that includes hardware from Sun and database software from Oracle. During a conference call with analysts Sept. 16, Oracle Chief Executive Larry Ellison promoted the machine's performance against what he said were comparable computers from IBM.

First Quarter Typically Slow Meanwhile, Oracle appears to have put on ice a computer development deal with HP the companies struck a year ago to sell the first version of Exadata. An Oracle spokeswoman says Oracle will continue to sell those machines "while existing inventory is available, for those customers who request it."

The first quarter of Oracle's fiscal year is historically a slow one, as the company bears the brunt of the summer months when customers, especially in Europe, curtail buying. Many other technology companies include September in their summer quarter, which softens the blow. Compounding the weakness, Oracle begins its fiscal year in the summer, so any new-year changes to its sales organization can affect productivity at an already slower-than-usual period.

During the call with analysts, Oracle executives said results were hurt by a stronger dollar, which erodes the value of overseas sales when they're translated into the U.S. currency. Oracle earned 22¢ per share when measured according to Generally Accepted Accounting Principles (GAAP), a penny higher than one year ago. New software license sales, a key indicator of future revenue, fell 17%, to $1.03 billion. Sales of new database and middleware licenses tumbled 21.5%, and new application license sales fell 4%. But software maintenance revenues, a highly profitable portion of Oracle's business that includes technical support contracts, increased 6%, to $3.1 billion.

Planning for Sun Integration Oracle issued a more positive outlook for the second quarter that ends in November. Co-President Safra Catz said revenues would range from unchanged to 3% higher, and the company would earn 26¢ or 27¢ per share on a GAAP basis, vs. 25¢ per share a year earlier. Wall Street analysts had expected about 1% sales growth in the second quarter.

As it moves into the brisker fall sales season, Oracle continues to plan its integration with Sun. The new database server the companies announced is "a perfect example of what we can do together," said Catz. "We continue to do what we can at arm's length."

Oracle has acquired 56 companies in the past five years for $30 billion, doubling its revenues. As it looks ahead to its next megadeal, Oracle hopes that a dry summer doesn't turn into a chilly fall.

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