Oracle earnings stress sector’s dollar woes

When Oracle, the world’s second biggest software company, reports its latest earnings on Thursday, it will highlight an inconvenient truth for the US technology industry: the big lift the sector has had in recent years from the weakening US dollar is over, at least for now.

In its fiscal year to the end of May, roughly a quarter of Oracle’s reported revenue growth came from foreign currency translation effects, as the falling dollar increased the value of its overseas sales. Given their strong position in large parts of the global technology market, many other US tech companies have seen similar lifts from their big overseas positions.

Currency adjustments have contributed nearly half of the revenue growth at software makers Symantec and Autodesk in the first half of this year, according to an analysis by Citigroup.

A bounce in the dollar since July, particularly against the euro, has put at least a temporary end to that benefit, just as tech companies are bracing for a downturn in demand due to the weakening economy.

Adobe, another big software concern, said this week that, in its most recent quarter, foreign currency adjustments had actually depressed its reported revenue slightly compared with the preceding three months, the first time for several years currencies have not provided a tailwind.

Since Wall Street generally looks at year-to-year growth rates rather than quarter-to-quarter, the full impact of the stronger dollar, if it holds, will not be felt until next year. However, the dollar bounce will also have an immediate impact in at least two ways.

For fast-growing companies whose growth is judged on a quarter-to-quarter basis, the currency tailwind of recent quarters will turn into an immediate headwind. That is still the case with Google, at least when it comes to the “whisper number” that Wall Street uses each quarter to assess the company’s earnings, said Sandeep Aggarwal, an analyst at Collins Stewart.

“It is significant for Google,” Mr Aggarwal added. “It is a trend reversal, after 10 quarters of positive impact.” Foreign currency earnings have helped to support Google’s growth rate as it has hit the inevitable slowdown that comes with reaching massive size.

Revenue growth in the second quarter fell to 43 per cent from 63 per cent a year before, but would have slumped to 36 per cent had it not been for a weaker dollar.

A second immediate effect will come as Wall Street analysts start to revise their earnings forecasts for next year to reflect the new exchange rates.

Author: Richard Waters @ www.ft.com