Oracle (ORCL) Falls From the Cloud
Shares of software giant Oracle (ORCL) were crushed last week, after the company reported weak earnings that missed analyst estimates on both the top and bottom lines. For its third quarter, the Redwood City, Calif.-based company earned 52 cents per share, or $2.5 billion, a flat gain from the 49 cents per share, or $2.5 billion, it earned in the prior year quarter. Adjusting for one-time charges, earnings came in at 65 cents per share, missing analyst estimates by a penny.
Revenue dropped 1% from $9.04 billion to $8.96 billion, well under the analyst projection of $9.38 billion. Daily Chart
Oracle attributed its bleak earnings to continued weakness in hardware system sales, exacerbated by a "surprise" decline in sales of new software. In other words, sales of hardware servers - once its bread and butter - slid as it struggled to transfer to software-based cloud applications and servers. However, the company was quick to claim that lower sales of its software was a result of sales force expansion, and not waning demand. Oracle's hardware systems revenue plunged 16%, while revenue from new software licenses and cloud-based subscriptions - widely regarded as its future growth market - slid 2% to $2.3 billion. Oracle had originally forecast software licenses and subscriptions growth to grow by 3% to 13%. Demand for Oracle's new cloud-based business applications suite, Fusion, remains weak as users have shown that they are content using the company's older Applications Unlimited program. Another nagging problem is the fact that customers can opt to install Oracle's cloud-based software on their own cheaper servers, instead of Oracle's more expensive hardware. A growing number of software vendors, such as creative software giant Adobe, have been migrating from packaged software to cloud-based subscription models, widely regarded as the future of software sales due to their higher margins and ability to lock in users. To keep up with this business model, Oracle added "thousands" of new sales representatives across the world that the company acknowledged need to be trained on achieving quarterly, rather than annual sales targets. CFO Safra Catz blamed Oracle's slower moving sales force for a "lack of urgency" which pushed deals from the third quarter into the current one. As the third largest software company in the world, Oracle is considered a bellwether of the tech sector. The company's stock has risen 7.5% over the past twelve months and 59% over the past five years. However, the endless crisis in Europe, a slowdown in China and U.S. federal budget issues have kept pressure on the company's earnings growth. Increased competition from (IBM
) and Salesforce have also prevented it from steadily growing its market share. For the fourth quarter, Oracle forecasts software license and subscriptions to rise by 1% to 11% - positive growth the company must achieve to stay relevant in the cloud computing race. It is expecting to earn 85 to 91 cents per share, squarely in line with the analyst estimate of 88 cents per share. The company expects revenue to grow between a decline of 1% to growth of 4%, below the analysts' forecast for 5% growth to $11.5 billion. Shares of Oracle currently trade at 10.91 times forward earnings with a 5-year PEG ratio of 1.11. Other News About ORCL Wall Street Questions Oracle's Strategy After Weak Q3 Sales
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Published on Mar 25, 2013
By Leo Sun