Oracle's Earnings: Summer Doldrums Set In

The bellwether tech company's disappointing quarter has Wall Street wondering how quickly software sales will rebound

By Aaron Ricadela

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."

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