A storm in an Oracle teacup...

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Oracle's stock price took a tumble last week which was surprising to many since the firm turned in a healthy profit. Certainly analysts have been puzzled at why the market responded as it did.

AMR Research's Bruce Richardson noted:

“I was keenly aware that the expectations were all over the place. In my notebook, I had the latest edition of BusinessWeek (dated March 31), which had a brief calendar blurb noting that Oracle was “expected to post unspectacular results.” I was also holding that morning’s edition of The Wall Street Journal. In a small box on the front page, investors were told that “Oracle is expected to report significant growth…despite the challenges many of its corporate customers face.” As I walked to the elevator, I had no idea whether BusinessWeek or The Journal would be right.

“That said, I was surprised when the first e-mail messages began streaming in on my BlackBerry after the earnings call. The first report noted that the stock was down nearly 10% in after-hours trading. When I got to dinner, one of the Oracle executives handed me the earnings press release. Total revenue grew 21% to $5.3B. Profits were up 30%. The most notable change was the decline in new software license revenue for applications from the previous quarter—$451M (Q3) versus $563M (Q2)—and the modest 7% growth from the year earlier period. This contrasted with the 65% and 63% growth reported for the first two periods of FY08 relative to the same periods last year.

“The drop-off in new application license sales was attributed to last-minute delays in getting some large orders signed. Some of these slipped into Q4 and have since closed. The Oracle people seemed fairly confident the sales force would close out the fiscal year with a pretty strong performance.”

Ovum's David Mitchell was equally puzzled:

“There are only so many ways that you can say that 'the company is performing well'. There are elements of the continued success in the latest results but there are signs that the global fiscal problems are beginning to have an impact in the industry. This makes Q4 more interesting than ever in the Oracle economy, and with more at stake than ever.

“The growth that Oracle posted was at the lower end of market expectations, with Oracle stock falling around 8%, after the close of market - returning some of the 10% growth that the stock had posted in the prior month. On the call with analysts the Oracle executives cited slippage in Q3 deals - rather than losses - with deals delayed into Q4. Giving guidance for the Q4 period the Oracle team gave guidance of 10-20% in new licence growth, and 15-19% growth in total GAAP revenue - factoring in some slippage from Q3 to Q4. When coming up with their guidance the Oracle team are assuming a lower close rate than they have done historically. Although pipeline appears to be strong, and close rate assumptions are conservative, there is a degree of risk building up. Oracle's Q4 is traditionally extremely frenetic and this year there will be more at stake than usual.

“In the US the weakest area appeared to be in the Applications business, posting a 1% shrinkage year-on-year in constant currency-based revenues. Applications revenues are traditionally more susceptible to slippage, given the higher complexity of applications sales and the more complex sign-off processes involved. In APAC there was a 5% growth in applications revenue, but that this was against a difficult comparator from last year - as the equivalent quarter last year was particularly strong. Continued growth in the emerging APAC markets is to be expected, though. Some of the Applications business comparators for Q4 are relatively benign, so there is potential for a Q4 rebound - but applications deals are notoriously more complex than technology deals.

"Technology revenues were strongest in the US, with a continued growth in database options and various elements of the middleware portfolio, such as identity management. With the impending close of the BEA acquisition it is clear that database and middleware will be a battlefield where Oracle wants to fight more strongly - with IBM being the clear target. The impact of strong European currencies and a weak dollar brought the gross revenue growth in Technology in EMEA down from 23% to 11% - when making constant currency adjustments. So...any rebound in the dollar will be very positive for EMEA.

“Cash flow from operations is one area that is not frequently commented on but it is becoming increasingly important for Oracle. It is this figure that gives Oracle the ability to continue its major acquisition programme, to invest in new R&D and to execute its stock buy-back programme. Only this week Oracle obtained a credit line for $2bn from lenders that include Bank of America and Wachovia. This, coupled with the very strong cash flow growth performance, gives Oracle plenty of headroom and its continued margin improvement - up to 41% - continues to show that Oracle is running a tight ship.”

All told, it's just another example of how much the market looks to Oracle and SAP for leadership in the market – and load both firms with possibly too many expectations. Any sign of a wobble – even if it is a minor one – has wider ramifications than it ought to. Steady as we go...


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