Despite earlier this week announcing disappointing first-quarter results, Oracle Corp. (Nasdaq: ORCL) says it expects its second quarter will be stronger. However, many analysts are skeptical, as the company’s attempted takeover of Sun Microsystems Inc. (Nasdaq: JAVA) has not gone as smoothly as planned.
Oracle reported revenue for the three months ended Aug. 31 fell 5%, to $5.05 billion. Analysts were expecting $5.2 billion of sales.
Net income rose 4% to $1.1 billion, or 22 cents a share, by Generally Accepted Accounting Principles (GAAP), but the company leaned heavily on support contracts and cost cutting to maintain profitability. The world’s second-largest software maker blamed the drop on declining overseas sales and a stronger U.S. dollar.
“when compared to U.S. dollars, reducing Q1 GAAP earnings by $0.02 per share,” the company said. “Without this impact, Oracle’s Q1 GAAP and non-GAAP earnings per share would have been $0.24 and $0.32, respectively.”
Oracle issued a more positive outlook for its fiscal second quarter, which ends in November. The summer is traditionally a slow period for the company which typically sees business pick up as its fiscal year moves forward. Additionally, the global economy is showing signs of improvement.
Oracle President Safra Catz said profit would be 35 cents to 36 cents per share in the second quarter. The company forecast revenue of about $5.6 billion to $5.8 billion for the period.
However, analysts remain skeptical that a fledgling economic recovery will necessarily lead to an increase in earnings.
“Just because people are starting to feel better about the economy doesn’t mean they’re ready to spend money on software,” said Partrick Walravens, an analyst at JMP Securities Inc. (NYSE: JMP), told BusinessWeek.
Sales of new software licenses – a key indicator of future revenue – fell 17% to $1.03 billion. Sales of database and middleware licenses plunged 21.5%. Middleware is software that helps different kinds of programs share information.
Additionally, Oracle’s $7.4 billion acquisition of Sun Microsystems has not gone as smoothly as planned.
In April, Oracle announced it would takeover Sun in a move that gives it control of the database market as well as Sun’s coveted Java programming language. Java-based software is not operating system-dependent and runs on over 1 billion devices worldwide, from cell phones to supercomputers.
JMP’s Walravens believes the buyout is partly responsible for Oracle’s lackluster first-quarter earnings.
“There’s a ton of pre-merger planning you want to do before an acquisition, and [first-quarter sales decline] shows management were probably distracted by the Sun purchase,” he told Bloomberg in an interview. Walravens rates Oracle’s shares “market perform” and doesn’t own them.
Of course, the bigger threat to Oracle’s business is an ongoing antitrust investigation that has been launched by the European Commission (EC). While, the U.S. Justice Department approved the deal last month, the EC is worried that by acquiring Sun, Oracle will be too strong a presence in the database market.
“Databases are a key element of company IT systems,” said Neelie Kroes, The EC’s competition commissioner. “In the current economic context, all companies are looking for cost-effective IT solutions, and systems based on open-source software are increasingly emerging as viable alternatives to proprietary solutions. The Commission has to ensure that such alternatives would continue to be available.”
It’s possible that Oracle will have to spin off Sun’s MySQL open-source database to accommodate the EC. The commission has until January 19 to reach a verdict on the merger. But as the commission deliberates, former Sun customers are defecting to Oracle’s biggest competitors.
Hewlett-Packard Co. (Nasdaq: HPQ) says it signed deals with more than 100 Sun customers between February and July, BusinessWeek reported. Meanwhile, International Business Machines Corp. (NYSE: IBM) has lured 250 customers from Sun to its own computer systems since January, and is adding about two accounts a week, according to Inna Kuznetsova, IBM's director of Linux strategy.
“The longer [the closing process] wears on, the more Sun's business deteriorates, and the more market share IBM and Hewlett-Packard take away," said Walravens.
Faced with an exodus of Sun clients, Oracle has taken some small steps to inspire more confidence in its fleeing customer base.
Earlier this month the company unveiled the Sun-Oracle Exadata Database Machine V2, a co-developed co-branded system that is meant to show that close engineering cooperation between the two companies is already underway.
The databased server is “a perfect example of what we can do together,” said Oracle’s Catz. “We continue to do what we can at arm’s length.
Oracle and Sun don’t have to be merged to make a product together. However, the first version of the machine was manufactured with Hewlett Packard.
“While the first version was built in partnership with H-P, this version leverages Sun’s hardware, clearly signaling the company’s intentions for Sun’s hardware division under the pending acquisition,” Tom Klasell, an analyst with Thomas Weisel Partners, wrote in a note to clients.
Oracle also took out an advertisement in The Wall Street Journal. That ad was meant to stem the tide of defections from Sun’s computer systems, as it made specific reference to increased competition with IBM. On its Web site, IBM describes Sun's hardware business as "highly uncertain" and having an "undefined future."
"I think someone at Oracle suddenly realized that Sun was bleeding so badly that what would be left when Oracle finally got control would be worth a small fraction of what they paid and no one would buy the hardware unit," Rob Enderle, an independent analyst, told ComputerWorld.
The ad was a positive step for many Sun customers, but if Oracle is going to stop the bleeding it’s going to have to keep the pressure on until the merger is finally approved.
“A lot of our clients are nervous, and they want to know what's going to happen," Irene Griffith, Sun customer and owner of PetroSys Solutions Inc. in Houston, told ComputerWorld.
"IBM is very good at creating FUD" – fear, uncertainty and doubt, she said. Adding to her anxiety, Griffith said that she has been unsuccessful at getting information from Sun. “They’re not talking to us, they’re not reaching out to us,” she said.
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