Oracle’s Business Grows in Fiscal Q3, But Not As Much as Expected
March 31, 2008 Timothy Prickett Morgan
When you are the second largest provider of ERP software in the world, the leader in databases, and the contender for the leadership position in middleware, people watch how your business is going, particularly with so much talk about a potential or actual recession in the U.S. economy these days. And so it was as Oracle announced financial results for its fiscal 2008 third quarter last Wednesday and gave Wall Street a bit of a disappointment.
Most companies would kill to have Oracle’s numbers, but the company’s earnings were lower than expected and its warnings about future growth prospects put a serious damper on enthusiasm on Wall Street last week, which in turn put pressure on stocks in the technology sector and on the markets overall in the United States. The fact is, Oracle is facing some pretty tough comparisons because of the acquisitions that came into play in fiscal 2007’s four quarters, and despite the softening of business in the third fiscal quarter ended February 29 (never a great one for Oracle and usually a weak one for IT spending), Oracle showed revenue and profit growth that only a software company with lots of captive customers can show, and operating margins that rival those from Microsoft.
During the fiscal third quarter, Oracle’s overall software sales (including product renewals and support contracts) rose by 21 percent to $4.24 billion, with new software license sales not growing at quite a large rate. Specifically, new software license sales rose by only 16 percent to $1.62 billion, which means sales of software updates and tech support was a big factor in overall revenue growth, rising by 25 percent to $2.62 billion. (Those update and support revenue streams are why Oracle has spent billions and billions of dollars acquiring companies in the past decade.) Oracle’s services revenues–by which is meant professional and other IT services such as integration and installation of applications, databases, and middleware–rose by 21 percent to $1.11 billion.
Most tellingly, new application software sales rose by only 7 percent, to $451 million. Clearly, some companies put their ERP spending on hold–particularly in the United States–as the economy started to wobble last October and continues to do so up to today. But Larry Ellison, Oracle’s founder and chairman, blamed it on a tough compare. When asked if the database business might see slower growth like the applications business, Ellison piped up on the conference call with Wall Street analysts. “Actually, it was an unusually strong growth in our technology business, both the database business and the middleware business,” Ellison explained. “So on the technology side, our growth rates are accelerating. And what happened with applications was very simple: Our growth rate is how we did this quarter versus a quarter a year ago, and we just had an exceptionally strong quarter a year ago and a very, very difficult comparison in Q3 in the applications business.” Specifically, Oracle’s application software business grew by 57 percent in the third quarter of fiscal 2007, and the comparison should be easier in Q4, Ellison said.
For the quarter, Oracle’s overall sales rose by 21 percent to $5.35 billion. The company brought $1.875 billion of that to the middle line as operating income, up 35 percent from the year-ago quarter, and reported a net income of $1.34 billion, up 30 percent. (While Oracle may these days bring a higher percentage of its revenues to the middle line than Microsoft, the Windows giant is several times larger and has arguably stronger monopolies with its desktop and server software.)
In any event, those sales were about $50 million shy of Wall Street’s expectations and profits were about $150 million lower than expectations. Which is why Oracle’s shares dropped nearly 7 percent on the Thursday after the financials were announced.
Safra Catz, Oracle’s chief financial officer, said that the company’s proposed acquisition of middleware maker BEA Systems had cleared the regulatory hurdles in the United States, was making its way through the European regulating bodies, and that Oracle was optimistic that it would finish the deal in its fiscal fourth quarter. The guidance that Catz gave to Wall Street last week for sales and profits in the fiscal fourth quarter–traditionally a very good one for Oracle–did not include any numbers from BEA, which will ultimately add to both the top and bottom lines. Looking ahead, Catz said that for the fourth quarter ending in May that Oracle expected total sales to be up 15 percent to 19 percent, which would put it at between $6.7 billion and $6.94 billion; earnings per share is expected to come in at either 37 cents or 38 cents, compared to 31 cents per share in Q4 of fiscal 2007.
“Looking at the continued growth in our pipeline, there actually could be some upside, quite a bit of upside to the guidance, but I want to be cautious given the macro news over the past few weeks,” Catz said.