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.
