eWEEK content and product recommendations are editorially independent. We may make money when you click on links to our partners. Learn More.
Oracle’s earnings report March 26, which came in at the low end of guidance and under analyst expectations, spooked Wall Street and suggested that the U.S. economic downturn is having a deleterious impact on Oracle’s strategy of buy-’em-as-it-sees-’em.
Oracle reported fiscal third-quarter 2008 license revenue of $1.62 billion and total revenue of $5.37 billion, below analyst estimates of earnings between $1.68 billion and $5.4 billion. The hardest-hit segment for Oracle in its three-pronged business portfolio of database, middleware and applications was applications, where the company has made the bulk of its acquisitions. Oracle reported $451 million in application sales for the quarter, well below the analyst consensus of $533 million in sales.
“On license, we were within our guidance range, but customers got a little more cautious at the end of the quarter, given what was going on in the financial markets,” Oracle Chief Financial Officer Safra Catz said during the March 26 earnings call with analysts. “Deals are getting done, although they took a bit longer than anticipated in the last few days of the quarter.”
Acquisitions come under scrutiny
While analysts agree that Oracle’s missed numbers are mostly the result of the faltering U.S. economy, the slip led some to suggest that Oracle’s acquisitions strategy could make prediction difficult in the future.
“Oracle continues to be significantly acquisitive, which could result in actual financial results meaningfully deviating from published forecasts,” wrote Charles Di Bona, an analyst at Bernstein Research, in a March 27 research note. “Slowing growth in the company’s core database market could also impact results and cause them to deviate from expectations. Furthermore, Oracle intends to be more acquisitive in the coming years, and a succession of large transactions could add to Oracle’s risk portfolio and make it more difficult to forecast the true growth rate of the company.”
Reuters reported March 27 that Oracle’s revenue shortfall led to a technology sector sell-off based on concerns that the usually strong performer’s results were a harbinger of things to come in business spending. Oracle, SAP and Google were among the major tech companies that saw a drop in their share prices following Oracle’s earnings report the previous day.
Blame deal slippage
Goldman Sachs Group analyst Sarah Friar said in a March 27 research note that Oracle’s third quarter had disappointed with a weak applications performance-down 12 percent year over year-but declined to lower the firm’s expectations of Oracle’s prospects. Goldman maintained a buy rating on Oracle.
“We are leaving our estimates unchanged [for full fiscal 2008 and 2009],” Friar wrote. “We still view Oracle as one of the most defensive names in our group given its broad maintenance base, international exposure and ability to cross-sell.”
Friar fell short of pinpointing Oracle’s acquisition strategy as a potential issue, but rather pointed the finger at “deal slippage at the end of February, driven by macro uncertainty, elongating sales cycles, and weakness in financials,” as creating a “tough read-across for other software vendors with enterprise and large deal exposure.”
Oracle has acquired about 45 companies since it began a massive shopping spree in 2005, including a dozen in 2008 alone. One of its biggest acquisitions, a $8.5 billion purchase of BEA Systems, is pending now. Surely more acquisitions are to come in the new year, as Oracle secured a $2 billion revolving line of credit earlier in the week of March 24.
Bernstein’s Di Bona said his firm is concerned by Oracle’s lack of disclosure-especially as it relates to the dozen acquisitions Oracle made in 2008, “10 of which were included in but not specifically accounted for in the quarter’s revenue figures.”
The issue is that Oracle makes it difficult to identify organic growth as opposed to growth through acquisitions, he said.
“According to Oracle’s cash flow statement, the company spent over $700 million (net of cash acquired) on seven acquisitions in the past nine months, none of which were broken out,” Di Bona wrote. “Given the lack of disclosure on the [earnings] call, we are unable to account for the impact of acquisitions. … We would again point out that this methodology of computing ‘organic’ growth is not our preference as it does not speak to organic growth of the acquired entities.”