"Altruistica": Seeking a return to full financial disclosure and regulatory oversight. A financial market analysis blog for "entertainment purposes" only by an experienced CFA seeking new hedge fund engagements for investment writing and analysis. The author has experience investing internationally, running a hedge fund, making angel investments, and helping launch five startup companies. Investors should do their own due diligence.

19 December 2006

ORCL- Missed layup EPS,Weak app licenses, curious accounting for acquisitions (Still taking charges on Siebel acquisition?)

Oracle Earnings Solid, But Slowdown in Software Sales
Posted on Dec 19th, 2006 with stocks: ORCL

Oracle reported F2Q07 earnings post-expenses of $967 million (18 cents/share) on revenue of $4.16 billion; analysts had expected 22 cents/share in earnings before options and acquisition expenses, a number the company met. Shares dropped about 2% after hours following the report, perhaps due to company guidance of a flat F3Q. F2Q earnings were up fully 26% from the year-ago quarter. CEO Larry Ellison, who has pledged to grow earnings 20% annually through organic growth and acquisitions, indicated that deferred revenue over the next three quarters may be greater than expected. The tepid report, however, left some analysts wondering if IT spending in general has become softer in corporate America. Software sales totaled $1.21 billion, up 14% y/y but short of guidance to 15-20% growth. In the conference call, Oracle president Charles Phillips said, "We continue to gain market share in applications from SAP, in middleware from BEA, and in database from IBM." Oracle stock is up over 40% this year.

Goldman Points out that four sectors account for more than 2/3rds of Information Technology (IT) spending- and with manufacturing decelerating, government "flat", financial services would have to rise sharply for their forecast of 6-7% overall growth to be achieved. But how can that happen after a record earnings year and going into a recession???
Their key findings are:

- Server virtualization goes mainstream: Server companies will have to contend with dull 6%-7% type industry revenue growth for several years, in our view…the key beneficiary (of virtualization), by a wide margin, should be VMware, whose intrinsic value within EMC (EMC) continues to grow. Also likely to benefit: Intel (INTC) and AMD (AMD), both of which are developing virtualization-specialized processors…Dell will probably escape the realities of virtualization in 2007 because of easy comparisons, 2008 could be a more difficult hurdle given its exposure to volume servers, which should be hit the hardest.

- Service-oriented architectures go from experimentation to implementation: Middleware sales among large infrastructure vendors should continue to see a tailwind to growth owing to demand for SOA management platforms. This would include Oracle (ORCL), Microsoft, SAP (SAP), IBM (IBM), BEA Systems (BEAS), and TIBCO Software (TIBX)… We expect in 2007 to see increasing effects of a push by the leading applications vendors—Oracle and SAP—into the middleware space, posing a growing competitive threat to incumbent middleware vendors that could dampen pricing and growth in 2008 and beyond for pure-play companies.

- From Web 2.0, we move to Enterprise 2.0: [I]nvestors who ignore this trend will do so at their peril given its ability to dramatically reshape leadership among enterprise technology companies and business models over the next decade…This is also where large IT incumbents such as Microsoft, IBM, Oracle, and SAP will likely do battle with up and coming SaaS vendors as well as Internet giants Google, Yahoo!, and eBay, which view the emergence of Enterprise 2.0 as their entry into the enterprise.

- Power and heat issues come to the fore in the data center: Problems of heat from sprawling server farms and accelerating power costs from servers and air conditioning are driving the need for new technologies in the data center, benefiting companies in both the old and new world.

- Networking: Many tech decisions become network decisions: We expect corporate network spending to continue to outpace overall corporate IT spending in 2007. In addition to a mix of simply end-of-life and capacity-related purchases, we see IT decisions increasingly tied to the network.

• Sources: Oracle F2Q07 Earnings Call Transcript, Bloomberg, WSJ, BusinessWeek
• Related commentary: Goldman On IT Trends: What Tech Companies Stand To Gain?,

* Oracle Investors Should Be Content With Stellent Acquisition -- Barron's

* Oracle Taking On Red Hat in Linux Market

• Potentially impacted stocks and ETFs: Oracle (ORCL) Competitors: SAP (SAP), BEA (BEAS), IBM (IBM) ETFs: iShares Goldman Sachs Software Index (IGV), PowerShares Dynamic Software (PSJ)


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