Oracle’s financials disappoint investors looking for a hero

With analysts nervously mulling over the prospect of recession, every significant financial report is being taken as an indicator of what the future holds. In March 2008, it was Oracle's turn to play bellwether - and its performance was not well received.

For most companies, the news that quarterly revenue grew 21% year on year and profits 30% would be fêted by investors. But for Oracle – where third-quarter revenues rose to $5.3 billion and profits hit $1.3 billion – it was not enough to appease hawk-eyed financiers seeking to confirm their bearish outlook.

In the three weeks before filing its financial reports, Oracle’s stock value grew 14% as investors sought refuge from economic uncertainty in what they believed was a company large and stable enough to withstand imminent turbulence. But following the publication of the results, share value instantaneously dropped back 8% – its steepest decline in six months.

The offending statistic in Oracle’s report was its figure for new application licence revenue – seen as a key indicator as it prefigures continued licence and support revenues. While new licence revenue from its database and middleware products grew by an impressive 20% year on year to $1.16 billion, new application licence revenue increased just 6.6%, reaching $451 million. In the preceding two quarters, application licence growth had averaged 64%.

Underperformance punished

Wall Street analysts had been led to expect that Oracle would generate almost $100 million more than this from its new application contracts. They punished the shortfall with gloomy forecast downgrades.

“The [Oracle] applications business is definitely very weak,” says Sarah Friar, an analyst at Goldman Sachs. “I think this is definitely going to spook the market.”

In the earnings conference call, Oracle CFO and co-president Safra Catz conceded that the analysts’ pessimism was not wholly unjustified. “Customers got a little more cautious at the end of the quarter, given what was going on in the financial market,’’ she admitted.

Nevertheless, co-president Charles Phillips appeared unfazed. “We’ve been through this before,” he said, “and we know how to adjust to it.”

David Mitchell, an analyst with IT industry watcher Ovum, believes that the stage is now set for a make-or-break financial report following Oracle’s fourth quarter, ending 31 May.

“There are elements of continued success in the latest results, but there are signs that the global fiscal problems are beginning to have an impact in the industry,” says Mitchell.

One (far smaller) company that believes it is better placed than most to withstand a recession is Red Hat. The company is the most successful of a group of vendors that sell support services for open-source software to enterprise vendors.

For user organisations, this eliminates the licence cost from software procurement, convenient in times of belt tightening.

Red Hat generated revenues of $141 million in the fourth quarter of its financial year, up 27% from the same period last year.

However, the company did not convert this revenue growth into a boost in profits, as net income grew by a comparatively anaemic 7% year on year. This is because Red Hat is still investing heavily in product and channel development, the company points out. Sales and marketing spend grew 31% during the quarter to reach $52 million, while R&D rose 32% to reach $26.3 million.

But the returns ultimately derived from such investment will prove the value of the enterprise open-source proposition, says Red Hat CFO Charlie Peters: “We believe that we’re still in the early phase of open-source adoption.”

Such is Red Hat’s confidence in the model that it has raised its predictions for its financial performance in the coming year – unusual in such times of caution. The New York Times reported a “flutter of rumours” suggesting that parties including Google, IBM and Oracle were interested in acquiring the company.

Now that the financial future of even the industry stalwarts is under question, the open-source proposition appears all the more appealing.

Listless sector

Evidence of a general lack of confidence in the IT industry to withstand an economic downturn came from the London stock exchanges.

A report from investment bank Close Brothers, published in March 2008, calculates that the combined value of all software and IT services companies listed on UK stock exchanges has dropped by more than £2.6 billion during the past year. That figure represents a 15% drop in the total market capitalisation of the UK-listed IT industry.

This slump follows a dwindling interest in the IT sector among investors, the report says. And as the public markets become less rewarding for companies in the sector, the temptation for private investors to sell out becomes ever stronger.

Indeed, almost a third of the acquisition deals relating to UK-listed IT companies in 2007 were backed by private money.

Such developments seem unfounded given some of the recent financial performances. Enterprise search software company Autonomy recently reported fourth-quarter revenues up 57% to £115.1 million and profits of £28.5 million, and nCipher, which makes security software, turned in annual revenues up 15% to £24.2 million, with profits of £2.5 million compared with 2006 losses of £5.5 million.

Further reading
Financial report – March 2008 on track to break $1 billion barrier. Plus, the fortunes of HP and Dell continue to diverge

Pete Swabey

Pete Swabey

Pete was Editor of Information Age and head of technology research for Vitesse Media plc from 2005 to 2013, before moving on to be Senior Editor and then Editorial Director at The Economist Intelligence...

Related Topics