Even Oracle Isn't Immune to the Slowdown

A disappointing third quarter highlights the software giant's vulnerability to the ripple effects a sluggish economy is having on IT. Tech investors looking for a stock haven amid roiling markets of late have turned to industry consolidator Oracle. Shares of the software company rose nearly 14% over a three-week span in March as investors bet on Oracle's formidable lead in database software and its aggressive acquisition strategy in business applications as an antidote to the economic malaise that's throttling IT budgets.

Some of those shareholders reconsidered their strategy on Mar. 26 after Oracle released fiscal third-quarter results that fell short of analysts' forecasts. Oracle reported sales of new business application software licenses, a barometer of future revenue, that were about $100 million less than Wall Street expected.

Total sales fell $70 million short of expectations in the period that ended Feb. 29, and Oracle shares fell in extended trading. "Our checks suggested [the results] were going to be pretty solid all around, so we're surprised by this," says Jeff Gaggin, an enterprise software analyst at Avian Securities.
Ellison Looks Ahead

Oracle executives attributed the shortfall to customers who are taking longer to sign off on IT purchases as the economy slows. "Deals are getting done, although they took a bit longer than expected in the last few days of the quarter," Safra Catz, Oracle's co-president and chief financial officer, said during a conference call with investors to discuss the results. Oracle Chief Executive Larry Ellison added that the company faced a difficult comparison with the year-earlier period, when new application license sales rose 57%. Ellison predicted a rebound in the business during the current quarter, which ends in May.

But for now, it's apparent Oracle isn't immune to the slump that's causing some corporations to curtail IT spending, darkening the outlook for a host of tech bellwethers, from Cisco Systems (CSCO), to Intel (INTC), to Dell (DELL). Dell's profits fell by 6.5% in its fourth quarter ended Feb. 1, as financial services companies slowed spending, Intel said on Mar. 3 it expects lower first-quarter profit margins on weaker flash memory prices, and Cisco on Feb. 6 issued a disappointing sales forecast for its third quarter (BusinessWeek.com, 2/8/08), which ended in April.

At Oracle, third-quarter application license revenue increased a mere 6.6%, to $451 million, far short of Wall Street's expectations for 30% growth, to $553 million. Oracle, the dominant supplier of database software, is counting on rapid growth in business applications, which companies use to manage payrolls, chart financial performance, and keep track of inventory levels, to expand in size and take market share from rival SAP (SAP). Oracle has bought about 40 software companies for more than $25 billion in a little more than three years to gain share in the market.

A Fine Ride for Shares

Despite the disappointing third-quarter growth, analysts say Oracle is still well positioned for the future. "Given the environment we're in, it was a decent quarter," says Andy Miedler, a senior technology analyst at Edward Jones. "Make no mistake about it—Oracle, and technology in general, is an economically sensitive area," he adds. "Customers are prudently being more cautious. You'd expect deals will take a little longer to close than they would just a few months ago."

Total revenue rose 21%, to $5.35 billion, in the third quarter, compared with $4.41 billion a year ago. Net income rose nearly 30%, to $1.34 billion, compared with $1.03 billion. On a per-share basis, Oracle earned 26¢, or 30¢ excluding special items, in line with analysts' estimates. But Oracle's revenues fell short of the $5.42 billion expected by analysts surveyed by Thomson Financial (TOC). Operating margins increased to 41%, vs. 39% a year ago.

For most of March, Oracle shares have been on an upward ride. During the three-week period between Mar. 5 and Mar. 26, the shares rose 13.56%, handily outperforming the Nasdaq Composite Index as well as large-cap tech stocks such as Microsoft (MSFT), IBM (IBM), Cisco, and SAP. Oracle shares closed Mar. 26 down 14¢, or 0.7%, at $20.94, and had fallen by more than 8% in after-hours trading.

Oracle forecast results for the quarter ending May 31 that were in line with analysts' estimates. The company said it expects new software license revenues to increase by 10% to 20%, including applications, databases, and middleware. It expects to earn 37¢ or 38¢ per share, compared with 31¢ a year earlier.
Cautious optimism

Moreover, Oracle's flagship database business continues to steam ahead. New license sales for database and middleware software grew 20% in the third quarter, to $1.17 billion, and the company signed database contracts with customers including RealNetworks (RNWK), Salesforce.com (CRM), and Omni Hotels. As Oracle continues to acquire companies, it's positioned itself as a supplier of more of the software its customers use to run their operations.

Oracle added to its middleware portfolio when it bought BEA Systems (BusinessWeek.com, 1/17/08) on Jan. 16 for $8.5 billion after a protracted takeover negotiation. The deal is expected to close during the current quarter. The same day, Oracle acquired document management software maker Captovation for an undisclosed amount.

The net result is that Oracle has a broader palette of products to sell to its customers, which results in sales reps being able to close deals for more products with each customer, UBS (UBS) software analyst Heather Bellini said in a Mar. 6 research report. In a Mar. 26 note she called Oracle's third-quarter application license sales "clearly disappointing," however.

During the company's conference call, Oracle's executives sought to reassure investors that the scope of its third-quarter troubles were limited. "We've been through this before, and we know how to adjust to it," said Oracle Co-President Charles Phillips. The argument is finding some takers. "In a big global economic downturn, should that occur, these guys are well positioned to weather that storm," says Avian Securities' Gaggin.

In the short term, though, investors who have turned to Oracle as a harbor could find the waves a bit rough.

Author: Aaron Ricadela @ www.businessweek.com

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Oracle's Agile PLM gains popularity

I recently spoke to Oracle about their Agile Product Lifecycle Management (PLM) solution, which has crowned them the leader in the PLM market -- or so they kept on repeating. Here is some information on what it is and how it can be of benefit to an enterprise:

* After its acquisition and integration of Agile Software Corporation, Oracle has been able to provide an integrated PLM solution for enterprises. PLM refers to the management of a product through the different stages in its lifecycle, from the initial concept to disposal.

* Oracle's Agile PLM provides a set of technologies for companies with a large collection of products that can be complex to manage. The solution helps companies manage information related to their products, such as customers, costs, suppliers, manufacturing, design, service, compliance and new products.

* Product information is usually dispersed across different global systems. Oracle’s Agile PLM supports collaboration between these systems and protects sensitive information with attribute-level security.

* Integration with other crucial systems such as CRMs, ERPs and CAD is also a feature of this PLM solution.

* Oracle has focused on specific industries such as foods, electronics, medical, aerospace and automotive, thus providing industry-specific expertise to companies operating in these sectors.

Overall this integrated PLM solution is meant to simplify product management throughout its lifecycle and consequently lets enterprises improve efficiency and deliver better quality products.

Is that really how it works? What experiences have you had with Oracle products beyond their database offerings? Let us know in the comments below.

Author: Lana Kovacevic @ www.builderau.com.au

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Oracle expected to post gains despite economy

Oracle Corp. is expected to report significant profit and sales gains when it posts third-quarter earnings next Wednesday, despite the difficult economic environment encountered recently by many of its corporate customers.

Analysts on average expect Oracle to post earnings excluding special items of 30 cents a share for the period ended in February, and $5.4 billion in revenue, according to FactSet Research.
That compares with earnings excluding special items of 25 cents a share and $4.41 billion in revenue in the same period a year earlier.

Software maker Oracle, which has numerous customers among the U.S. companies thought to be affected by the economic slowdown, has so far managed to turn in recent quarterly results that have met or exceeded Wall Street's expectations.

JMP Securities analyst Patrick Walravens wrote in a note to clients last week that he expects Oracle to again deliver a "solid" quarter Wednesday that includes earnings excluding special items of between 29 cents and 31 cents a share.
"Oracle appears to be benefiting from the consolidation of the software industry," Walravens wrote.

Oracle's ongoing acquisition spree has had it rolling up a variety of significant business software companies, most recently BEA Systems Inc., a maker of so-called "middleware" for which Oracle agreed to pay $8.5 billion in January. Middleware is software used by sprawling businesses to connect disparate networks and programs. The BEA deal "truly does open up a whole new set of enterprise license agreement opportunities," Walravens wrote.

Bear Stearns analyst John DiFucci wrote in a note to clients last week that Oracle is likely to meet expectations for its third quarter, and "likely benefited from a strong seasonal December month."

However, DiFucci noted that Oracle is unlikely to "show the magnitude of upside it has in recent quarters," and "may be experiencing effects of a deteriorating macro environment," though he doesn't expect any surprises in the company's outlook.

Pacific Crest Securities analyst Brendan Barnicle wrote in a note to clients Tuesday that checks on Oracle's business have been "a little weaker than earlier in the year." While results from Oracle's middleware business have been mixed, its applications business has been stronger than expected, Barnicle wrote.

More importantly, Barnicle wrote that its BEA acquisition will pay off well for Oracle soon.
"Oracle is likely to get a much bigger benefit from BEA than we had expected," Barnicle wrote, adding that if Oracle closes the acquisition earlier than anticipated it will likely see up to $200 million in additional revenue in its fiscal fourth quarter, rather than waiting until its fiscal first quarter.

"As a result, Oracle could grow [fourth-quarter] revenue by 17%, rather than by 14%, which is the current expectation," Barnicle wrote.

Author: John Letzing @ www.marketwatch.com

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