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Posted by Andrew Bartels on December 21, 2011
Oracle yesterday reported surprisingly weak results for its fiscal quarter ending on November 30 (see December 20, 2011, "Oracle Reports Q2 GAAP EPS Up 17% to 43 Cents; Q2 Non-GAAP EPS up 6% to 54 Cents"), with total revenues up just 2%, software revenues up 7%, hardware revenues down 10%, and services revenues flat. Even worse, hardware product sales were down 14%, new software license revenues rose just 2%, and license revenues for Oracle applications actually fell by 4%. Oracle had set expectations for revenue growth of 5% to 15%, and most financial analysts had projected growth at the high end of that range, based on Oracle's license revenues in prior quarters growing by 22% to 34% for applications, and 14% to 27% for database and middleware revenues. Oracle attributed the shortfall in revenues to potential deals that failed to close by the end of the quarter due to buyer caution.
For the tech sector, this is a worrisome report. Oracle's software revenues had been consistently stronger than the overall tech market, growing by 17% in US dollars in the prior quarters in 2011. If Oracle's software revenue growth slips to 7%, does that imply that the rest of the tech market is going to see little or no growth in Q4 2011?
I think the answer is probably not. First, Accenture on December 15 reported very strong results in its quarter ending on November 30 (see December 15, 2011, "Accenture Reports Strong First-Quarter Fiscal 2012 Results, with Record Quarterly Revenues and EPS"). True, Accenture is in a very different part of the tech market — IT services — than Oracle is in. And IT services vendor revenues tend to lag what happens in the software market, with decisions to buy licensed software in one quarter leading to bookings of consulting services to implement software in the next quarter, and then IT services vendor revenues in subsequent quarters. Still, Accenture did report strong growth in new booking.
Second, there are some special factors that hurt Oracle, above all the timing of bad economic news in November. Remember, the Euro crisis was dominating economic news, the stock market had been falling for most of the month, and neither the November employment report showing a solid increase in employment nor the November advanced retail sales report showing continued growth in US retail sales had been released. So business executives were understandably cautious about the business outlook. So far, December has had more positive news on the economic front (though news that the House of Representatives did not pass extensions of the payroll tax break and extended unemployment benefits and reports of renewed problems with the European Union's rescue program are not positive). Also, Oracle's software products had been running a bit on momentum, without much innovation in 2011 to its legacy products (most of Oracle's innovation has been in Fusion, which so far has not had enough adoption to make a difference). And Oracle's Sun hardware business has been struggling for a while, so its poor results don't necessarily indicate that server and storage revenues of other vendors will decline. All these factors suggest that other large vendors — especially EMC, IBM, and SAP, but also SaaS vendors such as salesforce.com — with fiscal quarters that end in December or January may well post better results for software and certainly better results for hardware and services than Oracle did.
I would also like to point out the impact of exchange rates. We at Forrester had already been assuming that tech growth rates in Q4 2011 would not be as strong as they had been in the first three quarters, especially when measured in US dollars. For the first three quarters of 2011, the US dollar's exchange rate against other currencies such as the euro and the Japanese yen had been weaker than the year before, boosting dollar denominated revenue growth for vendors like Oracle. With the flare-up of the European debt crisis in Q4 2011, the US dollar once again rose sharply in value against the euro, reaching parity with the exchange rate in Q4 2010. Without the currency boost, we expected that the tech market in US dollars would grow by around 7% in Q4 2010. In that context, it's worth noting that Oracle's currency adjusted revenue growth rate was 2%, the same as its reported revenue growth in US dollars. Moreover, on a currency adjusted basis, Oracle's revenue growth in the prior quarters had been 7% and 5%, and its software revenue growth had been 11% and 11%. So much of the slowdown in Oracle's revenues is purely due to currency impacts, not just to a drop in customer demand.
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