March 14, 2002 4:15 PM PST

Oracle earnings match warning

Oracle doesn't expect the fourth quarter to be any better than the third.

"As far as we can tell, tech spending for enterprise hardware and software remains very soft and doesn't yet appear to be improving," said Jeff Henley, Oracle's chief financial officer.

Henley was speaking at Oracle's conference call Thursday, after the maker of database software and enterprise applications reported third-quarter earnings of $508 million, or 9 cents per share. The results were in line with the company's earnings pre-announcement earlier this month. Prior to Oracle's warning, analysts, on average, expected Oracle to earn 10 cents per share, according to First Call.

Predicting earnings for the next few quarters is difficult because of the uncertainty surrounding corporate tech budgets, Henley said. However, Oracle is planning for a weaker fourth quarter than usual.

"We're going to assume things aren't getting better," Henley told analysts.

Oracle is preparing for software license sales in the fourth quarter to drop 25 percent to 30 percent from the third quarter. The company predicts fourth-quarter earnings will fall 1 cent to 2 cents from the previous fourth quarter, when Oracle earned 15 cents per share.

Third-quarter revenue was $2.2 billion, down 5.5 percent from the second quarter and down 16.6 percent year over year. That figure was less than the latest analyst estimates, which generally ranged from $2.3 billion to $2.5 billion.

Software sales dropped 29.8 percent to $789.6 million from $1.1 billion in the year-ago period. Services revenue fell 7.1 percent over the same period, to $1.44 billion from $1.55 billion.

Sales of applications for specific corporate services such as human resources and accounting declined 41 percent, although revenue from Oracle's applications server software rose 35 percent. Database revenue fell 23 percent year over year.

Several industry observers have suggested that Oracle is losing share in databases, especially given recent strength reported by one of Oracle's biggest database rivals, IBM. However, the drop in database sales does not mean Oracle is losing market share, said Larry Ellison, Oracle's CEO. Revenue may be down, but Oracle's percentage of installed seats is as large as ever, Ellison argued.

"By every measure we can find...every measure shows us gaining share," Ellison told analysts. "There's only one measure that shows us losing share: IBM says they got a lot of database revenue last quarter...That's the only measure where we're losing share."

At least some of the loss in database sales came from a product shift, rather than market-share losses, Oracle executives said. A larger percentage of Oracle's database sales are coming from the company's Standard edition, rather than its higher-margin Enterprise edition, Henley said.

Deals worth more than $500,000 generated 35 percent of Oracle's total license revenue, compared to 45 percent a year earlier, said Henley, who described that figure as the worst ever in his tenure at Oracle. That shift to smaller deals affected applications sales more than database revenue, he added.

"Customers are very slow to make commitments on large deals," he said.

Oracle has blamed the lower-than-expected results on a slowdown in Asia. However, some analysts are skeptical.

The company's sales in Asia fell 22 percent year over year, compared to 20 percent in the Americas. Japan's sales were especially weak, Henley said.

Company executives on Thursday pointed to a continued slowdown in technology spending, especially in industries that have been traditionally strong for Oracle, such as telecommunications, financial services and high-tech manufacturing.

However, other companies that sell enterprise software, such as Siebel Systems and Sybase, have said they are on track to meet their original targets for 2002. "Clearly, Oracle is bumping along the bottom still, and hasn't yet experienced the upturn we do anticipate later this year," Banc of America Securities analyst Bob Austrian wrote Thursday in a note previewing Oracle's earnings.

Oracle maintained its profit percentage. The company reported an operating margin in the third quarter of 34.9 percent, about the same as the second quarter.

Shares of Oracle fell 45 cents to $13.44 in Thursday's trading ahead of the report. The stock was trading at $13.14 in after-hours activity on the Island ECN, following the release of third-quarter results.

 

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