Oracle's Q3 Malaise Could Be Contagious
Oracle disappointed Wall Street with its limp third-quarter sales, rattling investors who look to the enterprise software giant as an industry bellwether. The company's hardware business is suffering from its failure to rebuild its faltering Sun acquisition, noted tech analyst Rob Enderle. Also, its cloud business is threatened by growing competition from Salesforce.com and Workday.
The bulls have been running on Wall Street but every silver lining apparently is cloaked in a gray cloud. In this case, it's the dismal Q3 earnings report Oracle released on Wednesday.
Oracle did actually make money. The company reported third quarter earnings of US$2.5 billion, or 52 cents a share, on revenue of $8.96. However, that was down 1 percent from a year earlier. Wall Street analysts were looking for earnings of around 66 cents a share on revenue of $9.38 billion.
Given recent stock dips by Apple and other tech players, could this be a portent that the bull market, which has reached record highs in recent weeks, could see corrections very soon?
Oracle's underperformance comes at a time of global economic uncertainty that has played havoc with currency markets. The company largely blamed currency fluctuations, along with a stronger U.S. dollar, for its miss. The question is did Oracle underperform, or did analysts overexpect?
"This shouldn't have been a surprise," said Rob Enderle, principal analyst with the Enderle Group.
"With hardware now a major part of their portfolio, their old hardware partners are looking for ways to distance themselves from the company," he pointed out.
"Sun joined Oracle on life support, and then they put a guy famous for cutting costs in charge of running the unit. This would be like assigning a doctor famous for doing aggressive amputations in charge of rehabilitating a quadruple amputee," Enderle told the E-Commerce Times. "There wasn't anything left in Sun to cut when Oracle got it -- it needed to be rebuilt."
Clouding the Issue
Oracle has seen its revenue for hardware systems fall some 23 percent to $671 million from a year ago, and with increasing competition from Salesforce.com and Workday, its cloud business isn't flying high either. Software licenses, including cloud subscriptions, fell a reported 2 percent to $2.3 billion.
"Oracle isn't the first name in cloud computing, so it is possible that there are alternatives that are taking a bite out of it," said Greg Sterling, principal analyst at Sterling Market Research.
"There has been this shift towards lower-cost computing models, and the enterprise proprietary model is under tremendous pressure," he told the E-Commerce Times. "This is especially true for those middle-size enterprise businesses that like benefits that the cloud offers."
Busting the Bellwether
Could Oracle's weak third quarter -- which followed a rather upbeat second quarter -- stop the bulls from running? Given the ongoing currency issues and the unresolved sequester battle, it is clear that Oracle isn't in this alone, but its difficulties won't help matters in the least.
"As a bellwether, Oracle will bring down the segment," said Enderle. "This is unfortunate because their problems are largely the result of very foolish and short-sighted decisions and not reflective of the industry as a whole."
However, there are some sectors within the tech industry that won't be negatively affected by Oracle's woes.
"The tech sector is a broad group of companies," Sterling pointed out.
"For those that are in the enterprise IT spending world, it may be true that Oracle could be a sign of a downturn. Companies that are doing more cloud-based applications are more insulted however," he said.
"What is moving the integration to the cloud is being driven by the hardware shifts in the market," Sterling added. "The traditional IT spending that is beneficial to Oracle is shifting, and those in this sector are potentially heading for a crunch."