Oracle Q1 results hint to a tough quarter for software

PALO ALTO, California: When executives at the world's second-biggest software shop warn that a revival in high-tech spending is probably farther off than originally thought, that's bad news for the rest of the sector, analysts said.

"I'm less optimistic than I was three months ago," Jeff Henley, Oracle Corp.'s chief financial officer said Tuesday, when the database giant posted quarterly net profits that fell by one-third from a year ago as Europe and Asia appeared to have caught the cold that has hampered technology purchases by U.S. corporations for the last 18 months.

"We believe this is strong evidence that we are still in a declining, not a bottoming, environment for software sales," W.R. Hambrecht & Co. analyst Rich Peterson said, noting that Oracle lowered expectations for the balance of its fiscal year ending May. Summit Analytic Partners analyst Richard Williams noted that JDA Software Group Inc., which makes software that helps retailers manage inventories, also issued a warning this week.

"We expect this to be an extremely difficult earnings season," Williams said.

Mean Season

In addition to being one of the world's biggest providers of database software, Oracle is a key seller of applications that help companies automate accounting, marketing and purchasing.

Its new applications sales for the quarter ended in August dropped 24 percent year-on-year. New database software sales -- which are partly driven by applications sales -- fell 23 percent. "The overall commentary from the company on the current demand environment was uninspiring," Merrill Lynch analyst Chris Shilakes said. And it served to dampen what little optimism remained for a near-term uptick in the hard-hit software sector, where stocks declined on Wednesday.

Such news is not likely to bode well for applications software makers SAP AG, PeopleSoft Inc. and Siebel Systems Inc. -- each of which is slated to report third-quarter earnings in October. Lehman Brothers analyst Neil Herman said the weakness Oracle saw in Europe points toward an industry-wide phenomenon.

"We continue to hear of struggles in the software sales process across the pond," Herman said. "We still worry that Europe will prove very challenging for software companies this calendar quarter and will likely prove the greatest area of potential risk for Oracle's next quarter," he added.

The pain spreads

Industry watchers also said Oracle's results underscored existing sore points in other areas of the software market. Thomas Weisel Partners analyst Tim Klasell said the apparent lack of new applications sales may translate into weak appetite for integration software from names such as webMethods Inc. and TIBCO Software Inc.

Software system testing products from Mercury Interactive Corp. also could be met with weaker demand, he added. Lastly, Klasell said Oracle's disappointing application server sales did not bode well for BEA Systems Inc., the top dog in that arena. The application server market remains challenging and sales of Oracle's product did not grow during the quarter, Klasell said.

"The fact that Oracle, the low-price application server provider, is having difficulty growing off a small base indicates that demand for application servers is not showing improvement," he said.

© Reuters