By Greg Markus (TMF Boring)
ANN ARBOR, Mich. (Dec. 8, 1997) /FOOLWIRE/ -- Oracle Corp. today reported results for the quarter ended November 30, 1997. Revenues increased 23% (29% in local currencies) to $1.614 billion from $1.311 billion in the same period last year. The six percentage-point negative currency impact is in line with what management had predicted during last quarter's conference call. Net income for the period was $187 million, or $0.19 per share, compared to net income of $179 million, or $0.18 per share, in the second quarter of fiscal 1997.
"Clearly, we were disappointed with the results this quarter," said Jeffrey O. Henley, executive vice president and chief financial officer. "While several factors impacted the quarterly license growth, the economic situation in Asia-Pacific clearly had a significant impact. In addition, the strength of the dollar continued to have a dramatic effect on our reported results this quarter. Without the impact of currency exchange, overall revenue growth would have been 29%."
OTHER DETAILS. Headcount growth continued the trend of slowing growth, up 23% year-over-year. Operating expenses were up 29%. Pretax margins were down due to the reduced revenues. Cash increased by approximately $300 million from the beginning of the fiscal year to $1.654 billion. Days sales outstanding (DSO) was flat relative to last year, at 74 days.
REVENUES BREAKDOWN. License revenues were up only 3% year-over-year in dollars. Services revenues continued strong at 41% year-over-year growth, or 47% in local currencies. Both server and applications license revenues were weak. Server revenues were up 3% (10% in local currency), and applications revenues were up 7%. Management had stated previously that they had expected a tough comparison on the applications side, due to strong sales last year, but this was "clearly" below expectations. Support services revenue increased 35%, and consulting and education revenues rose 46%.
PLATFORM BREAKDOWN. UNIX license revenues decreased 4%. Desktop (which includes Windows NT) increased 33%. Proprietary and other platforms license revenues declined 24%.
GEOGRAPHY. Americas reported revenue growth of 30% in local currencies (29% reported in US dollars), versus the same period last year. EMEA had the second greatest negative impact from currency, reporting revenue growth of 35% in local currencies (24% reported in US dollars). In Asia Pacific, which experienced a 14 percentage-point negative currency exchange rate impact, revenue increased only 1% in US dollars, or 15% in local currencies. Revenue growth in Asia was clearly the biggest disappointment, but growth in the U.S. was also below plan.
ASIA AND TELCO SALES. Clearly Asia is a big part of the problem this quarter. Conversely, Europe is strengthening. In the U.S. (Americas), growth in license revenues from major accounts (accounts greater than $500 million) was +35%. In "general business" accounts (accounts below $500 million), license revenues increased 51%; these accounts make up about 35% of Oracle's total business. "Verticals" applications revenues grew 29%, excluding the telecommunications verticals (for reasons that will become clear in a moment). When the telcos vertical is included, the quarterly license revenues growth drops to +23%. The other vertical segment that did not contribute was government, which was flat year-over-year. The telco market has been a star performer for Oracle for a long time. Now, however, just about every large telecommunications company in the world is standardized on the Oracle database, so that market is highly saturated in terms of database licensing revenues. The federal government market is also fairly saturated from a database license perspective. although less so than for telcos.
MORE ON TELCO SALES. When revenues in the Americas is cut by product type rather than by customer type, it reveals the same conclusion: database and applica revenues growth is 24% (telcos excluded) versus 18% (included), and applications revenue growth is -10% (included) versus +40% (excluded). Clearly, sales to telcos in the Americas were below plan. The telco vertical is by far the largest-selling vertical, so when that growth slows, it affects total license revenues. The problem was not with the sales team, it was with the plan. That plan was naively ambitious and did not reflect the near-saturation of that market. Management ise revising that plan accordingly. The telco market is not destined to permanent slow growth. There are major opportunities emerging in Asia, for example. Also, when Oracle has a full portfolio of applications to sell to telcos, applications revenues will improve.
CORE BUSINESS GROWTH. Excluding telcos and the Asian economic impact -- Japan is Oracle's second-largest database market -- the core database business is growing at around 20% annually, and the applications business is growing at 40% to 50% annually. Also, some of the deals that didn't make it into the second fiscal quarter have now been closed and will show up in the third fiscal quarter.
SALES REORGANIZATION. The shortfall went beyond Asia and telcos -- although those two factors account for a lot of it. The reorganization of the sales force over the past year probably also impacted revenues to some degree. Management will remove complexity of sales compensation plans to increase efficiencies.
YEAR 2000. Although there is no way to know for sure, it's possible that the Year-2000 issue helped Oracle's sales to large enterprises in previous quarters, as those enterprises upgraded their applications as part of their Y2K plan. That could have a negative impact on apps sales in the middle of calendar 1998. On the other hand, mid-market companies may only now be formulating and implementing their Y2K plans.
MICROSOFT. Regarding competition from Microsoft (Nasdaq: MSFT), Oracle's management was probably more concerned about that last year than they are now. Microsoft's SQL Server just hasn't stood up to scrutiny, and OEMs and customers are now aware of the problems in scaling it. SQL Server sells well to smaller businesses, but then so do Oracle's NT-based products.
ORACLE8. It always takes time to get a new product accepted by the market. Also, customers will have to change the design of their applications to take full advantage of Oracle8s new features. So there have not been that many customers who have adopted Oracle8 yet. In the next three to six months, Oracles recently released Web Tools will provide good tools revenues and will also help customers migrate to Oracle8. Release 11.0 (slated for March) will also influence pull-through to Oracle8.
GUIDANCE. Currency impact in Q3 should be a little less negative -- perhaps four to five percentage points. On the expense side, there's probably not a great deal that can be accomplished in a single quarter, but management will examine expenses closely and will reallocate resources to align them with sales and marketing opportunities. In hindsight, the plan for Q2 was unrealistic, especially in terms of underestimating the scope of problems in Asia, the slowing sales to telcos, and certain sales staff reorganization issues. Management remains optimistic about the database business, but they are more subdued in light of this quarter's results. Management expects another quarter of comparatively slow growth.
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