Oracle Profit Slip May Signal Deepening Recession

In yet another sign of weakening in the technology sector, enterprise software giant Oracle (Nasdaq: ORCL) announced a decline in profits on Thursday.

The Redwood Shores, Calif.-based company reported US$1.29 billion in earnings during the fiscal quarter ended Nov. 31, down 1 percent from $1.3 billion in earnings during the same period last year. The year-over-year drop in earnings was the first Oracle, a technology stalwart, has reported in three years.

Oracle reported $5.6 billion in revenue for the quarter, up 6 percent compared to $5.3 billion in revenue during the same period in 2007.

Investors appeared satisfied with the results: Oracle's stock was up 7.2 percent to $17.82 per share in mid-day trading on Friday.

Oracle a Bellwether

Oracle's year-over-year software revenue was up 8 percent to $4.5 billion during the quarter, while new software license revenue was down 3 percent to $1.6 billion.

Software license updates and product support revenues were up 14 percent to $2.9 billion while services revenues were down 2 percent to $1.1 billion.

Were it not for the unexpected strengthening of the U.S. dollar against foreign currencies, Oracle's earnings would have been higher, the company said.

It will be difficult to know just how strong Oracle is until the company announces its next quarterly results in early March, said Rob Enderle, principal analyst at the Enderle Group.

"The financial performance of a business always looks backward, not forward," he told the E-Commerce Times.

As for Oracle's latest financial results?

"They're not great," Enderle said. "They're not uniquely bad for Oracle, though. They're still running the company well. Oracle is a bellwether technology stock, so this is just another warning that next year is going to be pretty ugly."

Enterprise Software Hurting

The collapse of major financial institutions and the year-long U.S. recession have taken their toll on enterprise software companies.

"The financial segment is one of the largest consumers of enterprise-class software, and that segment isn't going to be buying much next year," Enderle said. "For [Oracle] to miss indicates just how bad the economy is. I don't think anyone yet understands the magnitude of this recession."

That said, there will be opportunities for large software companies to grow in 2009.

With so many businesses cutting costs, there is a need in the market for IT companies with software products that inject efficiencies into business operations, Enderle said.

The Acquisition Market

At the same time, larger companies like Oracle with a history of aggressive acquisition behavior may also be able to grow by buying up other companies and technologies on the cheap.

"Oracle has a lot of cash," Enderle noted.

Indeed it does. Oracle reported cash and cash equivalents of $7.3 billion at the end of the latest fiscal quarter.

That said, Oracle won't be able to buy its way out of the recession.

"Typically, if you can diversify enough, you can avoid some of these problems," said Enderle, "but in this kind of recession, you can never diversify enough. Even highly diversified companies like HP (NYSE: HPQ) and IBM (NYSE: IBM) are showing signs of weakness, and they're usually invulnerable to market downturns."

87,000 Strong

At a time when many other tech companies are slashing their workforces, Oracle is adding employees. Since August, the company has added 1,500 workers, bringing its total worldwide workforce to 86,657 employees.

That could change, however.

"Typically, companies don't like to cut employees in the fourth quarter because it's bad for morale," Enderle said. "I wouldn't be surprised if [Oracle] adjusts its labor pool in the next quarter."