Oracle (ORCL): Where There’s Smoke, There’s Fire?

Oracle (ORCL - Annual Report) is trading down after reporting numbers that met earnings estimates but were weak with regard to sales. On the conference call, Chief Financial Officer Safra Catz gave the following details:

New software license revenue came in at $1.2 billion, up about 14% year over year. We had expected to be at the high-end of our 15% to 20% new license range based on our strong pipeline. However, we ended the quarter a point below that range. Earnings came in right at the guidance number of $0.22. As we have looked at the new license results, we believe it basically came down to execution on a number of deals that did not close in the quarter.

This is particularly worrisome given that some analysts had said Oracle had set a low bar that should be easy to clear.

Cowen’s Peter Goldmacher this morning reiterated his Outperform rating on the stock. “Our broad based checks lead us to believe that business in 2Q was just OK, which seems to be consistent with the chatter,” he wrote in a research note. “We expect 2Q to be a repeat of 1Q in that consensus estimates are conservative enough that the company doesn’t need to do anything particularly heroic to get over the bar.”

The problem is, it looks like they may have tried some last-minute heroics yet still missed the mark. You may recall that a week ago we noticed Oracle had apparently joined a mutual admiration society with Plantronics (PLT). Specifically, we said:

Now, it’s quite likely that this was simply a way to share cost-free favors (talking each other up in a press release) as each business negotiated a standard supply contract. However, it is always something that should draw attention when two parties enter an agreement that may not be arms-length. It would be better to look at it and decide nothing is wrong than to overlook something that could potentially be a warning.

In the cases of Plantronics and Oracle, there were no specifics regarding the size of the deals or time frame over which they extend. Neither is a major (10%) customer of the other, so there is some limit as to how much the deal could help one or the other. Questions investors may want to pursue include:

  1. Were the agreements similar in size? Revenue recognized from barter agreement is of lower quality (less likely to recur) than cash revenue.
  2. Given that Oracle’s fiscal quarter ends in November, the arrangement could have allowed them to book last-minute revenue. If their revenue for the quarter misses or only slightly exceeds analyst estimates when they report next Monday, a good conference call questioner could ask how much this agreement contributed (particularly with respect to license revenue.)
  3. Given that Plantronics is much smaller, they could potentially benefit more from the deal than Oracle but they are potentially in a less favorable bargaining position. Their investors might want more information regarding the size of the agreement for that reason.

So, question 2 has now been answered (at least partially.) We know that Oracle needed some last-minute deal closings, and may have sweetened the deal with Plantronics to include standardizing on their headsets and the resultant back-patting. Unfortunately, we were unable to join the live call and ask how much the Plantronics deal contributed to the quarter, and none of the other callers took our suggestion.

We can also consider the revenue at least moderately on the weak side (per question one.)

We still think Oracle’s acquisition strategy is good for the company and the industry competitive structure. However, these signs of weakness suggest that the turnaround might not be going as smoothly as previously believed.

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