Oracle's Q3 miss: Canary in enterprise software licensing coal mine?

"We believe something more secular is occurring as cloud computing increasingly entices CIOs to refresh their legacy IT systems with cloud services rather than infrastructure," says one analyst.

Oracle executives said the company's third quarter miss on revenue and earnings was due to execution and rookie sales reps and business is strong going forward. However, analysts, many of whom were predicting a strong quarter just 24 hours ago, are now wondering if Oracle's issues are much deeper and apply to other enterprise software vendors.

Why the broader worry?

VMware also had comments about IT spending. So did Teradata.

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While Oracle's issues may not be macroeconomic completely, there is a broader question about the enterprise licensing model in general. "Oracle’s miss doesn't instill confidence in the enterprise software demand environment, as we believe "bread-and-butter" smaller deals were scarcer," said Wedbush analyst Steve Koenig.

Here's a look at the reaction to Oracle's quarter.

Peter Goldmacher, analyst at Cowen:

While management pointed to sales execution as the primary issue, we have a hard time believing that almost all the legacy software names are suffering from poor sales execution at the same time. We believe the primary issue is a fundamental shift in the technology landscape away from legacy systems towards a new breed of better products at a lower cost both in Apps and in Data Management. Virtually every emerging software trend is having a deflationary impact on spend. As long as Oracle can maintain the pace of maintenance renewals, the model should remain relatively stable, but our confidence in the renewals business is waning.

Oracle shares were off 9 percent or so following a third quarter miss. Here's a look at Oracle shares over the last three years.


Oppenheimer analyst Brian Schwartz:

We believe something more secular is occurring as cloud computing increasingly entices CIOs to refresh their legacy IT systems with cloud services rather than infrastructure. Additionally, software purchasing is becoming more decentralized with decision-making power shifting away from IT and weakening the selling advantage as a "one-shop supplier." These trends dampen big-ticket on-premise software purchasing and remain a headwind for the infrastructure vendors. Nevertheless, Oracle's cloud-computing product strategy (M&A and innovations) should put it in good position to monetize on its large installed base, and along with positive 4Q seasonality, makes us think its execution issues are unlikely to linger near term.

Stifel Nicolaus analyst Brad Reback:

We believe Oracle's disappointing license revenue coupled with recent weak data-points from several other infrastructure players will likely increase investors’ concerns the environment is deteriorating.

Evercore Partners Kirk Materne:

While the software miss was broad-based, the 1% annual decline in the Americas stood out after a +22% result in 2Q, with technology license sales particularly disappointing. Acquired software license revenue was $146 million, which implies organic software and cloud revenue declined nearly 8% year over year.