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Seer, interrupted

21 December 2011 By Richard Beales

Oracle has fallen short of its usually reliable earnings foresight. The technology group lost some $20 billion, or 14 percent, of its market value after a subpar report for the quarter to Nov. 30. The sell-off could be overdone: Larry Ellison’s firm may soon regain ground, as its bosses expect. But the rare stumble could signal a shareholder double whammy: a weak tech environment and a hiccup in Oracle’s own trajectory.

Both Oracle’s $8.8 billion of revenue in the quarter and its adjusted 54 cents a share of profit for the quarter fell short of expectations. The last time profit undershot what analysts expected was more than a decade ago, according to Thomson Reuters I/B/E/S. The surprise factor may partly explain the size of the market reaction.

There are, however, genuine concerns. Revenue from new licenses, an important indicator of new business, rose only 2 percent from a year earlier, less than anticipated. Safra Catz, Oracle’s finance chief, said customers had suddenly added new layers of approval, delaying purchases as Oracle’s quarter was closing. Executives conceded they hadn’t paid enough attention. With more sales staff and renewed focus, they expect many of these deals will still happen, boosting the next quarter.

That could turn out to be the case – and Oracle’s record since the financial crisis struck is impressive. But news from the likes of Intel and Texas Instruments has pointed to weakening conditions. Estimates for S&P 500 Index earnings growth for the fourth quarter have been shrinking all year – just the kind of trend that makes chief executives keep spending on a tight leash.

Then there’s Oracle itself. It took the blame for the sales miss and reckons it can fix things there. It’s also weeding out less profitable products acquired with Sun Microsystems early last year. Hardware sales declined, though margins are high and Ellison was keen to highlight new product bright spots.

However temporary, the hiccup in Oracle’s earnings machine reveals vulnerabilities if the company loses its edge or makes mistakes with its long-running string of acquisitions. Selling shareholders may have ascribed too much value to one disappointing quarter. But like Cisco Systems before it, Oracle will one day become less of a growth machine. There’s no shame in a slower-growing business with Oracle’s 45 percent adjusted operating margins. Investors may have just glimpsed that future.


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