Should Oracle Buy Into Services?
Oracle’s earnings results were a bright spot in at the end of a chaotic week for the financial sector. After dipping to $18.10 in the week, the stock soared to $21, helped by the company’s positive performance and the Fed’s bailout decisions. However, it could be hit hard by a stronger dollar.
Oracle Corporation (NASDAQ:ORCL) on Thursday reported Q109 revenues of $5.3 billion, up 18%. GAAP net income was up 28% to $1.1 billion. Operating margin was up 170 basis points to 29%. Non-GAAP EPS was up 32% to $0.29, versus Wall Street’s estimate of $0.27. In Q1, the company bought back shares for about $500 million.
By segment, Services revenues were up 9% to $1.2 billion. Total software revenues were up 20% to $4.2 billion with new software license revenues up 14% to $1.2 billion. Software license updates and product support revenues were up 23% to $2.9 billion. Technology license business revenues grew 27%, versus 23% in Q108 and Q408. Core database software revenues grew 21%, while new middleware licenses rose 35%. Applications license revenues, however, were the weak spot, declining 12% to $331 million, mainly due to 65% applications growth last year. Analysts were expecting $416 million in applications license revenues.
Applications revenues were $1.37 billion while database and middleware revenues were $2.8 billion. As per Gartner, Oracle has increased its market share in database to 49% while in middleware, with the help of the BEA acquisition, it has grown 35% and is getting closer to overtaking No.1 IBM.
By region, revenues from the Americas increased 13% to $2.68 billion, EMEA was up 19.6% to $1.83 billion, and Asia Pacific was up 30% to $814 million.
For the second quarter, Oracle expects revenues to be negatively affected by the recovering dollar. Revenues are expected to grow 12 to 15% in constant currency ($6.01 to $6.17 billion) and 9 to 12% at current rates ($5.85 to $6.1 billion). In 2007, the weak dollar had a 7% positive impact on revenues while a stronger dollar would have had a negative 3% impact.
I will close with one thought: should Oracle buy a services company to compete with IBM Global Services going forward?
Oracle need not worry about a strong dollar. Except for short bouts where the dollar recovers temporarily, the long term direction unfortunately is not up. With few exceptions, Americans companies with significant international exposures will do benefit from a soft dollar more than they’ll suffer from a strong dollar.
Structurally, the fundamentals will work against the dollar. The US is maintaining a negative accounts deficit, a negative trade deficit. In addition, the Chinese are riding the dollar down by fixing their currency to the dollar instead of floating freely in the market.
Short-term weakness from a strong dollar will be more than offset in the longer term by other factors that will work to weaken the dollar.