Strengthening Dollar Whacks Oracle's Second Fiscal Quarter

Published: January 5, 2009

by Timothy Prickett Morgan

As odd as this may seem, a strengthening U.S. dollar hurt the financial results that software giant Oracle reported for its second quarter of fiscal 2009 ended November 30. Considering the self-inflicted wounds in 2008 that the U.S. economy is trying to heal from, you might think that a stronger dollar would be a good thing. But as Oracle's most recent results show, a strong dollar is only good when U.S. companies are buying a lot more stuff than overseas customers.

But for U.S.-based multinational IT suppliers, a weak U.S. economy has been a bit of a boom as they get more and more sales overseas. Now, as the malaise spreads globally, the dollar is doing better despite the weakness in the U.S. economy, so any slackening in sales overseas gets amplified as the foreign currency gets brought back home for Uncle Sam to collect taxes on.

In the case of Oracle, this effect was significant. In the fiscal second quarter, Oracle had sales of $5.6 billion, up 5.5 per cent. New software license sales were down 2.5 percent to $1.63 billion, which is not surprising considering the state of the global economy and the strengthening of the dollar, while software updates and product support sales rose by 14.4 percent to $2.85 billion. Services sales at the company (meaning real services, like implementation and consulting) fell by 2 percent to $1.13 billion. Net income for the quarter fell by 1 percent to just under $1.3 billion. As usual, Oracle wanted to talk about earnings per share, which came in flat at 25 cents a pop and held steady by share buybacks.

Now, here's the effect of the strengthening dollar, according to Oracle: new license software sales would have rose by 5 percent, product support would have rose by 20 percent, services would have been up 5 percent, with overall sales up 12 percent; these numbers would have pushed net income up 10 percent. As I am fond of reminding everyone, this makes for a great story and helps with assessing how businesses are doing in their local regions, but the fact is, the dollar strengthened and this is all the money that came back home, in this case to Redwood Shores, California, for Oracle.

The decline in new software license sales in fiscal Q2 was a lot smaller than it was in fiscal Q1 ended in August, when Oracle saw new application software license sales (remember, this is not database or middleware sales, just applications) fall by 12 percent to $331 million. While Oracle chalked this up to a tough compare, Wall Street started wondering if this had more to do with the softening U.S. economy. Overall new software license sales (across all Oracle products) rose by 13.8 percent to $1.24 billion.

In fiscal 2009's second quarter, new application software license sales also took a hit, down 15.2 percent, and it looks like support contracts from the installed base (boosted by price increases) saved the day for applications. Application license revenues fell by 9 percent in the Americas, by 28 percent in EMEA, and by 13 percent in Asia/Pacific. The decline in AP is one of the factors that made fiscal Q2 worse for Oracle than fiscal Q1, if new license sales is a leading indicator for the economy. In fiscal Q2, Oracle's new database and middleware license sales rose by a modest 3.8 percent in the quarter, to $1.16 billion. Database and middleware sales were up 5 percent in the Americas (thank you, BEA), up 2 percent in EMEA, and up 4 percent in AP.

Larry Ellison, one of Oracle's founders and its current chairman, said in a conference call with Wall Street analysts that the company might have beat out Big Blue for the top position in middleware in the quarter. "Middleware sales continue to grow very strongly, even in this economic climate, even after correcting for the strengthening of the dollar," Ellison explained. "We believe we are at least the same size as IBM in middleware, and we may have, in fact, passed them to be the number one middleware company. If we haven't passed them, we are very, very close in terms of revenue, and our middleware business is growing dramatically faster then IBM's middleware revenue." Charles Phillips, Oracle's chief executive officer, said Oracle now has over 80,000 middleware customers.

While Oracle is quick to brag about its $10.6 billion in cash and equivalents, this is more than canceled out by its $11.2 billion in debts. That dizzying array of acquisitions that Oracle has done over the past several years didn't come for free, as you can see. Lucky for Oracle, it is generating cash and business is more or less holding, so it can start working down that debt. Cash is king right now, and debt can be crushing. Oracle has, of course, bought itself a huge installed base of customers, and that is something like money in the bank in the IT sector--if you play your cards right and don't annoy or ignore the customer base.

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