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

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.

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. 

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.