Currency Fluctuations, Weak App Sales Hit Oracle

The worsening economy and the strength of the U.S. dollar hit Oracle, although it still remains well positioned against the competition.

Second quarter GAAP total revenues were up six percent year over year (YoY), but net income was down one percent to $1.3 billion, Oracle (NASDAQ: ORCL) chief financial officer Jeff Epstein said in the company’s second quarter earnings call today.

This translates into GAAP earnings per share (EPS) of 25 cents, in line with the YoY figure.

Epstein said total revenue growth will be flat in the third quarter at today’s currency rates, and EPS will be 22 to 24 percent.

As Oracle Co-president Safra Catz predicted during the last earnings call, currency fluctuations impacted earnings. “Had the dollar not strengthened so substantially our non-GAAP earnings per share would have come in at 37 cents, three cents more than reported today,” she said on today’s call. “The shift in the dollar alone over the past quarter completely overwhelmed the research and development tax credit we received.”

Catz added that the currency fluctuation also cut EPS by one cent.

The current economic conditions also hit Oracle, in applications sales, which fell by nine percent on a current currency basis, Gartner analyst Kenneth Chin told “In this economic environment, the business applications – the ERP, JD Edwards, Peoplesoft sales – which involve multimillion dollar projects, will be the first to get deferred,” Chin said. He expects the weakness to continue at least through the first half of 2009.

Layoffs due to the recession will also impact Oracle as well as its competitors, notably SAP, (NYSE: SAP) Chin said. “With Citibank reducing its workforce by 53,000 people and Bank of America by 35,000 people over three years, you’ll have overcapacity, so that means there will be less need to increase licenses, and they’ll probably consolidate some licenses and take maintenance off some of them,” he said.

Add the financial industry meltdown to the mix and subsequent consolidation, and Chin predicts, “we’ll see some significant challenges for Oracle.”

Maintenance a strong point

So far, maintenance revenue has not been hit, Oracle Co-president Charles Phillips said during the earnings call. “Our renewal rates were consistent,” he said.

And on a more positive note, Oracle chairman Larry Ellison said middleware continues to grow very strongly even after correcting for the strength of the dollar. “We believe we’re the same size as IBM and could be the number one middleware company,” he added. “Our middleware business is growing faster than IBM’s.”

Phillips said middleware was the standout in the quarter. “All the products within BEA Fusion Middleware are growing strongly,” he said. “We now have 80,000 customers and are growing at four to five times the rate of IBM WebSphere.”

Oracle is incorporating BEA’s technologies into its products, and bought BEA to help its drive into service oriented architecture (SOA). Oracle released its first Web and SOA platform, Oracle 11g, into beta in August.

Customer relationship management (CRM) offered in software as a service (SaaS) mode is another area where Ellison said Oracle is doing well and claimed the company had a “a series of competitive wins against Salesforce.”

The third area Ellison highlighted was the HP Oracle Database Machine, introduced at its OpenWorld conference in October. HP and Oracle have put a lot of demonstration machines into customers’ hands, and Ellison, while optimistic, said he expects it will be a while before this results in in sales.

Gartner’s Chin warned that Oracle’s revenues may drop. “They’ll come up short on the revenue side, and even Safra said they expect to have lower wins in terms of closing some of those big deals,” he said. “However you look at it, application is a weak spot in terms of big ticket items.”

Overall, though, Oracle is better positioned than its competitors such as SAP, Chin said. “That’s partly because of their maintenance revenue and the diversity of their product set,” he said.

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