Oracle's Q3 falls short, revenue misses mark; Hardware systems tank again

Oracle's Q3 falls short, revenue misses mark; Hardware systems tank again

Summary: Oracle's fiscal third quarter misses on many fronts as revenue comes in way short of expectations. Hardware systems sales continue to fall.

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Oracle's third quarter earnings had a big buildup but fell short of analysts' expectations amid currency fluctuations and a sales shortfall in most units.

The company reported third quarter earnings of $2.5 billion, or 52 cents a share, on revenue of $8.96 billion, down 1 percent from a year ago. Non-GAAP earnings were 65 cents a share.

Wall Street was looking for earnings of 66 cents a share on revenue of $9.38 billion.

In a statement, Oracle largely blamed currency fluctuations. A stronger U.S. dollar hurt reported revenue. However, even with constant currency Oracle's total revenue would have been flat. Non-GAAP earnings would have been a penny higher to meet expectations.

What's the problem?

  • For starters, new software licenses and cloud subscriptions fell 2 percent to $2.3 billion.
  • Hardware systems products revenue in the third quarter was $671 million, down 23 percent from a year ago.
  • Software license updates and support revenue was up 7 percent from a year ago.
  • The results countered analysts' collective bullishness leading up to the report.

What's notable about Oracle at this juncture is that it is facing multiple challenges. First, there's the obvious software as a service competition from the likes of Salesforce.com and Workday. But there is also talk that Oracle has had trouble keeping subscribers from its recent cloud purchases. And then there's the attack on Oracle's maintenance revenue stream from Rimini Street. Toss in big data, Hadoop and NoSQL and Oracle's database unit may also see challenges. What's unclear is whether Oracle's second quarter, which did well, or the third quarter, which bombed, is representative of the company's fortunes going forward. 

Oracle president Safra Catz said "we're not at all pleased with our revenue growth this quarter," but noted that the quarter ended the same day the government was on a sequester deadline and deals slipped to the fourth quarter. Catz also blamed sales execution and said:

What we really saw was the lack of urgency we sometimes see in the sales force as Q3 deals fall into Q4. Since we've been adding literally thousands of you new sales reps around the world, the problem was largely sales execution, especially with the new reps as they ran out of runway in Q3. Many of the pushed out deals have already closed. Our product portfolio is as strong as it has ever been and we won more than our fair share of deals. Our discussions with customers continue to be elevated to the most strategic level. There is a lot of enthusiasm around our leadership in software, engineered systems and our real world approach to cloud deployment. Looking forward, we're encouraged by the tremendous pipeline growth but clearly we have you work to do on training new reps.

Catz outlined the following outlook for the fourth quarter:

  • Cloud and software license revenue growth will be 1 percent to 11 percent, a wide range.
  • Hardware product revenue growth will be down 12 percent to down 22 percent from a year ago.
  • Non-GAAP earnings will be between 85 cents a share to 91 cents a share with GAAP earnings 72 cents a share to 78 cents a share.
  • Revenue growth in the fourth quarter will be down 1 percent from a year ago to up 4 percent.

Wall Street is looking for Oracle to report fourth quarter non-GAAP earnings of 88 cents a share on revenue of $11.52 billion. In other words, Oracle's earnings will be roughly in range with estimates, but revenue will fall short. Keep in mind Oracle's revenue has been bolstered by acquisitions.

Oracle president Mark Hurd talked up win rates and the product pipeline. CEO Larry Ellison also was upbeat. Executives also declined to blame the results on macroeconomic factors around the world. 

Reaction to the results was swift.

orcl032013a

 

Oracle executives touted the company's operating margin---47 percent on a non-GAAP basis---cloud applications and the new SPARC T5 servers, which will be unveiled next week. The challenge for Oracle is that cloud subscriptions fell along with new licenses and hardware sales have been dismal for multiple quarters. 

orcl032013b

 

 


By the numbers:

  • Sales and marketing expenses in the third quarter were $1.8 billion, up 6 percent from a year ago.
  • Research and development spending in the third quarter was $1.186 billion, up 4 percent from a year ago.
  • Hardware system product expenses were down 21 percent in the third quarter to nearly match the decline in sales.
  • Software revenue in the third quarter was $6.67 billion, up 4 percent from a year ago. Of that sum, software license and cloud subscription revenue was $2.33 billion, down 2 percent from a year ago. Software license updates and product support revenue was $4.34 billion, up 7 percent from a year ago.
  • Hardware systems revenue was $1.24 billion, down 16 percent from a year ago. Hardware support revenue fell 6 percent and products dropped 23 percent. Analysts had been looking for Oracle to turn the corner on its hardware business soon.
  • The company ended the third quarter with $16.1 billion in cash and equivalents.

Topics: Tech Industry, Cloud, Data Centers, Enterprise Software, Oracle

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14 comments
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  • Maybe the Google lawsuit will help them...

    ...IF they can get the appeals court to revisit the "Android is an unauthorized copy of Java" lawsuit revived.
    DonRupertBitByte
    • How is that?

      Java was secure app until Larry got it by default when he acquired Sun Microsystems. Larry has destroyed the reputation of Java.
      Terry Schneider
  • Server hardware is a bad business

    One day the analyst community is going to wake up to the fact that virtualisation is a massive sea-change and that they need to look beyond 'growing hardware revenues' as way of measuring the underlying value of a business. Oracle has made a decision to control the value chain to deliver excellent vertically integrated solutions to their customers. In a world where virtual servers are growing exponentially and physical servers in single digit percentages they need to be a bit smarter and work a bit harder.
    MaxiMonkey
    • Not quite ....

      Servers - of some type - are required to run all cloud/virtual environments. "Big Analytics" (the next logical step after "Big Data") requires high performance infrastructure/servers to work effectively.

      What really makes high performance hardware attractive is often the physical footprint of all of those machines. Although the term "software-defined data centers" implies no single, physical facility in which all the machines run (which can be true) in fact, the energy costs (including electricity, water, etc.) and many other operating costs scale with the size of the physical space used, and can be substantial.

      I don't mean to suggest that a software-defined data center isn't the answer - it's a great solution for many applications. But there are still economic considerations that will slow many IT shops' rapid adoption.
      Njia1
      • Missed @MM's point

        Companies are going to buy hardware - separately - to grow their virtualized server farm - at the best price point. Oracle's integrated solution strategy will not even make the final cut for consideration. I'd add the proliferation of open source databases - ORCL has MySQL but it's not the cash cow 11g is - and the growth of backend as a service.
        beau parisi
        • Engineered systems, no thanks, the market is speaking

          Anyone that buys an Oracle engineered system must not have taken an economics class. The world has proven that commodity INtel based servers, with or without virtualization, can power most of our complex business systems. Why pay 4-6x for an engineered intel server in a shiny case with a big "X" on it when you can by the same size or larger Intel based server from many other stong vendors. I will resist the soapbox on Oracle RHEL fork that is "free" with Oracle server support.
          scotemi
    • Re: virtualisation is a massive sea-change

      Virtualization doesn't make the hardware go away. In fact it adds about 15% hardware overhead of its own.
      ldo17
    • Not so fast...

      Hardware manufacturers like Teradata have adapted well to the virtualization trend. The issue is Oracle has inferior p poproducts.
      ryork272
    • What school did you study at?

      Virtual servers are hosted by real hardware servers.
      Terry Schneider
  • "Executives also declined to blame the results on macroeconomic factors...

    ...around the world."

    Well, I think the executives were just trying to not sound like they were making excuses, but reality is that, the economic conditions around the world do affect anything that a multi-national company is involved in.
    adornoe
  • Killing The Hardware As Well As The Software

    Looks like the value is steadily going out of every single thing that Oracle acquired from Sun...
    ldo17
    • Let me correct that for you

      "Looks like the value is steadily going out of Oracle".

      The Sun purchase was a favor (Ellison) to a friend (McNealy). It was clearly not a sound business judgment.
      bitcrazed
      • Stick to PC stuff, bitcrazed

        @bitcrazed, I don't think your comment means anything. You have no information to substantiate it. You should stick to the PC/Windows stuff.
        Eleutherios
    • Agreed...

      Exadata is inferior to the competition in 90% of the applications. In limited mixed workload situations it competes well (where OLTP is required). Otherwise it's a me-to product with inferior specs.
      ryork272