Soft Database Sales Could Dent Oracle, Analysts Warn


Lehman Brothers analyst Israel Hernandez sparked a sell-off Wednesday when he sent his clients a note warning that Oracle appears to have ended the quarter with soft database sales as several large deals failed to close. UBS's Heather Bellini echoed that concern; her research indicated that several big, greater-than-$10 million deals Oracle had in the pipeline slipped out.

While financial analysts had mixed views on how to contextualize the reportedly soft sales, shareholders sent Oracle's stock diving. Oracle shares fell to a three-month low on Thursday, closing at $17.88 on the New York Stock Exchange -- a 7 percent fall from Monday's close.

Oracle's Dec. 18 quarterly results report will be closely watched by investors, partners and industry observers looking for signs of how well Oracle's core businesses are faring as it continues an aggressive acquisitions spree to build its applications business. Oracle previously told analysts it expects its software license revenue to increase 15 percent to 20 percent over last year's second-quarter total, and its overall software revenue to increase 19 percent to 21 percent. While it's unlikely to miss those broad targets, analysts will pounce on signs of weakness.

"We believe the push out of some of these deals could cause some to view execution as somewhat sloppy versus [Oracle's] prior two quarters of flawless execution," Bellini wrote in a research note. Still, she held an overall positive view of Oracle's operations: "Our checks suggest that some of the large deals were delayed due to Oracle holding firm on pricing, but where we see little risk of the deals going to a competitor."

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In addition to his database concerns, Hernandez warned of apparent Siebel sales softness "as a result of increasing integration concerns." Still, Hernandez's channel checks turned up reasonable overall optimism: "Most partners are expecting a strong Q3, as many deals have only been pushed into Q3 and not taken off the table."

Oracle's business is under a microscope because of the large, pricey bets the company is making on its acquisitions and because of its executives' aggressive comments about the strength of its business. After surpassing expectations last quarter (following a four-year streak of falling short of guidance in its first quarter), Oracle claimed to be trouncing SAP in the market, a claim SAP vehemently rejected.

Distinguishing Oracle's bluster from business reality is frequently a tricky task for those tracking the company. Oracle knocked Red Hat's business for a loop two months ago when it announced that it would compete with Red Hat for support contracts for Red Hat Linux. It's too early to know how that move will affect Oracle's bottom line (or Red Hat's), but a recent study suggests the gambit may pay off for Oracle more as a marketing ploy than a new business segment.

First Albany surveyed 54 Red Hat customers for their views on Oracle's offering and found little interest. Five percent of respondents considered Oracle's "Unbreakable Linux" offering intriguing, while 59 percent said they would never consider switching under any circumstances. (Of course, even those not seriously evaluating Oracle's service are willing to use it as leverage against Red Hat: 31 percent of First Albany's respondents said they plan to use Oracle as a bargaining chip in price talks with Red Hat.) Only one of those polled in the study planned to fully switch from Red Hat's support to Oracle's.

Asked which vendor provides better support, half sided with Red Hat while 4 percent named Oracle, with 46 percent saying they're both comparable.

And, in an echo of the outrage from some quarters that greeted Oracle's hostile takeover bid for PeopleSoft, a few Red Hat loyalists were indignant at Oracle's chutzpah. "Where did Oracle get the idea that they were omnipotent deity of the support world?" asked one respondent to First Albany's study. Said another: "There are mixed thoughts within our organization about Oracle's actions, none of them particularly supportive of Oracle's methodology, intention or ability to execute."