What Went Wrong With Oracle’s Quarter?
Ahead of the report, everything looked so good. Now Oracle shares are trading down more than 9 percent, following a quarterly earnings report that was surprising for how far it fell short of the consensus expectations of analysts. Expect Oracle’s results to drag down the enterprise tech sector tomorrow, as analysts study the tea leaves for what this means for corporate tech spending overall.
So what happened? A few things, as Oracle execs tried to explain on a conference call.
- The currency effect: As President and CFO Safra Catz explained, what had been a 1 percent tailwind for currency effects turned into a 2 percent headwind. With all the violent swings in the value of currencies around the world as compared to the U.S. dollar, Oracle suffered a negative effect that pinched revenue.
- Deals didn’t close during the quarter: Catz said that in the final days and weeks of the quarter, some customers added an extra layer of executive approval to close deals to buy Oracle stuff. That meant that some deals Oracle had expected to close before the quarter’s end moved into the next quarter. Catz said that Oracle has taken steps to better manage deal flow to take this into account. It is consistent, however, with recent statements from other enterprise IT vendors, like IBM and NetApp.
- Transitions: Oracle’s SPARC server business just switched to a new chip called the T4, which was unveiled late in the quarter. The machines require a total upgrade, and that means a lot of testing with existing applications, which can slow down deals for the new machines, while at the same time sapping demand for the prior generation of products. That had a lot to do with hardware sales dropping by 14 percent year over year to $953 million. As Catz put it: “We saw good early demand for the new SPARC SuperCluster, but only released the product for general availability at the very end of the quarter, allowing us to ship only a couple.”
Catz also predicted that hardware sales will decline as much as 14 percent this quarter, although CEO Larry Ellison was bullish on its growth prospects later this year. New software license revenue, a key metric gauging software sales, is expected to grow in a range of 2 percent to 12 percent. Total sales are expected to grow in the range of 3 percent to 7 percent, and per-share earnings are expected to come in between 56 and 59 cents, which is in line with the consensus of analysts.
There were a few things that went right. Ellison did what he usually does on a conference call, and crowed about examples where Oracle is beating a competitor. This time, the targets were IBM, Cisco Systems and SAP, but not his usual punching bag, Hewlett-Packard. Oracle won several competitive deals from Big Blue and Cisco, as well, with customers as varied as Australia’s University of Melbourne, the U.S. Food and Drug Administration and the Hyundai Kia Motor Company.
Ellison also hinted that Apple is a big Oracle customer. He mentioned a “a very large American smartphone manufacturer” that had bought more than 30 Oracle Exadata systems as it built out its cloud. Unless I’m missing something, there’s really only one company that fits that description, and that’s Apple. Its use of Oracle gear within the mix at its North Carolina data centers has been speculated about before, but never confirmed by Apple directly. (Big surprise, that.)