The Oracle Setback: A Malaise More Specific Than Representative

Global tech giant Oracle announced its results for the quarter ending February 28, 2013, missing forecasts and putting investors to worry about the technology sector and about the global economic scenario. Oracle’s performance is often used by Wall Street to gauge the direction of corporate technology budgets. Naturally then, concerns over the health of the economy are raised when Oracle posts a lacklustre set of numbers. The dismal results also had Indian IT stocks tumbling last week. However, it seems that Oracle’s problems are more company-specific than macro.

In the quarter under review, the company announced a decline in revenues by 1% and flat profit numbers. Oracle derives a large chunk of its revenues from international markets. While Europe continues to limp its way to recovery, China too has been showing signs of moderation. These factors have obviously had a direct impact on the revenues of Oracle.

However, the problem becomes clearer when you drill down deeper. The company’s hardware systems revenues dropped by 16%, which was more than the forecasted 3-13% decline. What also came as a real surprise, rather a shock, was the decline in revenues from new software licenses and online subscriptions (cloud). Oracle has traditionally been selling software, and has forayed into offering cloud services just last year. By this time, the competition had grown large and fast. Smaller vendors of cloud-based services, offering their services for much cheaper prices had proliferated and captured a large market.

It is true that Oracle did enter this segment with a bang and acquired companies like Taleo, RightNow Technologies and Eloqua. However, consolidated cloud offerings currently account for about 10% of the total software revenues. The problem of Oracle’s relatively-nascent cloud business and higher dependency on traditional software lies in competing with smaller players and having to offer services at a low price.

Although there is a clear need to shift business to the cloud, Oracle would have to make the transition with utmost care. The company expects about 45% of its revenues for fiscal year 2013 to be driven by software updates and support agreements. If these suffer, Oracle would lose its reputation of maintaining consistent topline growth. It would thus have to tread on eggshells even while making a rapid transition to cloud services.

While the demand slowdown from Europe and China will have obviously affected the performance, Oracle’s problems in terms of shifting business from traditional software models to cloud services and the underlying demand for its products seem to have put the company in a spot. On the other hand, this does take off some worries that investors have with regard to the performance of the Indian IT sector as a whole. The industry did show a slight comeback in Q3FY13, and demand seems to have picked up considerably compared to last year.