The last thing the tech market needed right now was a disappointing set of earnings from Oracle Corporation (NASDAQ:ORCL), but unfortunately that is exactly what it got. It would be an understatement to say that it has been a difficult 2013 so far for the tech industry and these numbers will do little to assuage many fears. But what do they mean for Oracle and how do they relate to the rest of the tech world?
Oracle disappoints, again
Clearly the numbers came in towards the bottom of the guidance ranges. All of which is somewhat disappointing given that many investors have been hoping for a second quarter (2Q) bounce back. Last time around Oracle Corporation (NASDAQ:ORCL) blamed some sales execution issues and the timing of the sequester. However it calmed investors by describing its pipeline as being up and, claimed that the issue was really about the timing and execution of deal closure.
Well it was a different story this time around with sales execution quoted as improving ‘significantly’ and economic weakness cited in a few areas like Brazil, China and Australia. Moreover, transaction sizes were described as being smaller (a sign of economic pressure).
The good news from a geographic perspective was that its US and EMEA performance were as expected with 4% and 5% new license growth respectively. The problem was with Asia-Pacific down 7%. This is a worrying sign for the industry because many technology companies are relying on Asia for growth.
What the industry is saying
As a bellwether Oracle Corporation (NASDAQ:ORCL)’s results will be closely watched and those of us hoping for some sort of confirmation of a return to better days would have been disappointed. In a sense it is a mere continuation of what we have been seeing elsewhere. For example, Palo Alto Networks Inc (NYSE:PANW) recently reported results. It missed estimates and guided lower than the market consensus for the next quarter. Although Palo Alto Networks Inc (NYSE:PANW) is in a different area (IT security), I found its results interesting because other companies in the sector had previously reported weakness in April. Unfortunately Palo Alto came out and confirmed that conditions in May were only ‘in line’ with the reduced expectations created by a weak April. Another indication of weakness and it appears to be linear.
One interesting aspect of Palo Alto is that its telco service provider revenues do not make up a significant part of its revenues. This is in contrast with other tech companies like say F5 Networks, Inc. (NASDAQ:FFIV) and Fortinet Inc (NASDAQ:FTNT). These companies missed estimates and disappointed with guidance. Both cited weakness in their service provider verticals and this may well continue into the current quarter. On the other hand Palo Alto’s results are more indicative of the wider tech spending environment and investors will need to hear some more positive noises from bellwethers like IBM and Oracle Corporation (NASDAQ:ORCL) before feeling very confident with Palo Alto.
Moreover Oracle is facing some operational challenges as it shifts revenues towards cloud-based solutions. It described its SaaS (software as a service) based revenues as having a $1 billion run rate. This is fine but to put it into context its full year revenues are closer to $37 billion. In addition some cloud-based companies like Rackspace Hosting, Inc. (NYSE:RAX) have reported some weakness as enterprises still seem keen to use any excuse to withhold IT spending. In fact in its last quarter it declared that its revenue per server declined to $1,308 from $1,310 last year. This is not a good sign for a company supposed to be in a high growth phase. In Rackspace Hosting, Inc. (NYSE:RAX)’s case it was partly due to customers delaying purchases of legacy systems while they appraised its new OpenStack public cloud offering. Rackspace also has increasing competition from the likes of Amazon Web Services (who has been cutting prices) and I take this to be another sign that conditions have weakened in technology in 2013.
With regards to Oracle’s direct competitors like International Business Machines Corp. (NYSE:IBM) and SAP AG (ADR) (NYSE:SAP), these results are obviously not great news and they got marked down in sympathy. Moreover Larry Ellison was quite candid on his view that SAP’s Hana database was ‘virtually never’ seen in the market and even referenced some large German industrial companies that had bought Oracle’s rival Exadata database machine in order to run SAP’s applications. He also suggested that Hana could never successfully compete with Exadata. Frankly there is no love lost between SAP and Oracle, even when it comes to yachting, and this sort of comment has been heard before. Moreover I think SAP AG (ADR) (NYSE:SAP)’s investors can take some heart from the fact that EMEA (its core market) was a bit stronger than expected for Oracle.
As for IBM, Oracle’s report was a bit worrying. It pretty much reported a similar story to Oracle last time around by blaming things like sales execution, the sequester, the weather and even the change in the Chinese Government. Will it do the same this time? It’s hard to tell but International Business Machines Corp. (NYSE:IBM) didn’t lower its full-year forecast last time around and announced it would take some workflow rebalancing in Q2. All of which will put some pressure on it to deliver in the current quarter. As for the issue with the Chinese Government, did we see signs of this in the weak results that Oracle just reported?
Where next for Oracle?
The positives in this report were that the transition to new hardware product systems is going a bit better than expected and the US and Europe are doing okay. In a sense it is another story of current macro weakness amidst ongoing change in Oracle’s business as it shifts to cloud based solutions and new hardware products.
In the last quarter it made sense to pick up some Oracle stock after disappointing results and I wouldn’t be surprised if the same applies this time too. The stock trades on an enterprise value to EBITDA multiple of just 7.4 and generates huge amounts of cash flow that currently represent over 10% of its enterprise value. On a value basis the stock looks cheap and I wouldn’t be surprised to see Oracle increasing its returns to shareholders in future. It looks a good long term hold but be prepared for volatility as the tech spending environment still looks a little weak this year.
Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Rackspace Hosting. The Motley Fool owns shares of International Business Machines (NYSE:IBM). and Oracle.
The article What This IT Bellwether’s Results Mean to the Market? originally appeared on Fool.com and is written by Lee Samaha.
Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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