One of tech’s bellwethers missed estimates and saw hefty declines in its hardware business. On top of this Oracle Corporation (NASDAQ:ORCL) reported negative growth for new software licenses and cloud software subscriptions; so is that it for technology? Are Oracle’s earnings about to presage a period of deteriorating earnings for the Nasdaq? And where next for Oracle?
Oracle’s Earnings
In short the results were disappointing. Oracle Corporation (NASDAQ:ORCL)’s overall revenues declined 1% and it missed its own revenue guidance of 1-5% growth for the quarter. If this wasn’t bad enough, new software licenses declined 2% and software revenues overall were only up 4%. This growth wasn’t enough to offset hardware revenues, which declined 16%, and services, which fell 8%.
Turning to the guidance for Q4, Oracle forecast 1-4% overall revenue growth with new software license and cloud subscription growth bouncing back to 1-11% and hardware product growth continuing its decline by 12-22%.
What Went Wrong?
I’ve summarized the key points and why Oracle’s management is optimistic over Q4:
The sequester fell on the last day of the quarter so some deals were delayed or will fall in to Q4 as a consequence.
The adding of thousands of new sales executives caused some disruption over execution.
The pipeline was described as being up significantly, and there was little doubt on the conference call that this was an execution and timing issue rather than macro or product related.
The turnaround in execution is forecast to be ‘quick’ rather than running over a few quarters, and Oracle was described as a company whose revenues are moving into Q4 anyway.
Oracle Corporation (NASDAQ:ORCL)’s win rate was declared to be up.
The last point implies that it isn’t losing market share and affirms that this is not about product. Putting these arguments together it’s not hard to conclude that this is a temporary issue which will be resolved in a quarter. Indeed, this may prove a great buying opportunity in the long term. Unfortunately the market simply doesn’t see it this way in the short term and the immediate reaction was an aggressive markdown. My concern isn’t so much with the sales execution issue as with longer term matters.
Challenges and Opportunities
In reality there are other developments giving investors cause for concern. The main one is that Oracle Corporation (NASDAQ:ORCL)’s cloud strategy is working, but it isn’t a big enough part of its overall sales to deal with any demand lost from corporations who want to replace their existing IT systems with cloud based services. If this movement is accelerating quicker than expected then it is likely that Oracle’s revenues will suffer disproportionately. The good news is that Oracle has been aggressively preparing a cloud strategy, and it certainly has the cash pile to make more acquisitions in the space. It may need to.
As for hardware, the weakness was expected. Oracle is clearly going through a period of product transition. This isn’t unusual; indeed its key rival IBM went through a similar thing with its System Z mainframe. This product’s revenues have been up strongly in recent quarters, and IBM is forecasting double digit growth for System Z in the first half. This is a good example of what Oracle is talking about when it talks of generating growth next year with its hardware sales. However, for now it appears that the point of inflection with its hardware has been pushed out by another quarter.
In addition, it’s hard not conclude that IBM is doing well against Oracle in middleware because it reported accelerating growth within this segment. IBM’s recent results suggest that the IT spending environment is doing fine.
Where Next for Oracle?
I think there is a good case to see the glass half full for Q4. The rest of the industry has been making positive noises, and Oracle Corporation (NASDAQ:ORCL) is a company prone to a bit of variance in its results. Whether this is due to Larry Ellison’s ebullient nature or not is anyone’s guess. However, I recall a gloomy Q2 2011 set of earnings which was promptly followed by a recovery. In addition, this year’s Q2 was particularly strong so perhaps some deals were pulled forward, and Q3 suffered accordingly.
Thinking longer term Oracle probably needs to demonstrate that its expansion of cloud based sales is accelerating and perhaps make an acquisition or two. Furthermore, it needs to convince the market that it can keep on track with its launch of new hardware. This could take time.
The stock certainly isn’t expensive on an EV/EBITDA of less than 9 and carries the prospect of a reward for shareholders with a bounce back in Q4. However, even if there is a bounce-back following better sales execution the stock will still be guided by how Oracle Corporation (NASDAQ:ORCL) deals with the cloud transition and its new hardware releases. Lots to think about here.
The article This Tech Giant Crashed, Where Next? originally appeared on Fool.com and is written by Lee Samaha.
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