Oracle plunges on revenue slowdown

Oracle's stock plunged to 29, down more than 21 percent, in mid-afternoon trading. The stock closed at 36.88 on the Nasdaq yesterday, and has traded as high as 41.17 and as low as 12.13 during the past 52 weeks.

A slew of investment banks lowered their outlook on the No. 1 database firm this morning. Merrill Lynch lowered the stock to "near term accumulate" from "near term buy." Donaldson, Lufkin & Jenrette, Piper Jaffray, and Warburg Dillion Read all downgraded the stock from "buy" to "market perform," "neutral," and "hold," respectively.

Oracle reported third-quarter net income of $293 million, or 20 cents per share, one cent better than Wall Street estimates and up 36 percent from one year ago.

The company was expected to report earnings of 19 cents per share, according to a First Call consensus estimate.

The database software giant's third-quarter revenue climbed to $2.08 billion, up 19 percent from last year's $1.75 billion.

During a conference call with analysts, Oracle executives said the two-month delay of its new Oracle 8i database may have hurt database revenues as customers waited for new technology to come out. The company released the new database in early March.

Analyst Gary Abbott, of Punk, Ziegel & Company, said Oracle's third-quarter database and applications sales were disappointing.

"The earnings were slightly better than expected, but the revenues were light," said Abbott, who expected $100 million more in total revenue. "Oracle did manage to grow, but not adequately."

Abbott said he expected database licensing to grow 16 percent, not the 10 percent the company reported. He expected applications licensing to increase 25 percent, but it only inched up 5 percent.

"There's a general market slowdown that Oracle is not immune to," he said.

Abbott said sales have suffered because of the Year 2000 problem, a slowdown in the Enterprise Resource Planning market, and two other market factors: the delay of the Microsoft Windows 2000 operating system and the rapid ascension of the Linux operating system.

"There's a lot of dynamics that's balancing and counterbalancing right now. And it's causing confusion and delay," he said.

The company said product-related revenue rose 16 percent compared to last year, while Oracle's Education and Consulting services increased 27 percent.

The company said sales in the Americas grew 17 percent compared to the same period last year, and climbed 19 percent in Europe and 25 percent in Asia.

In all, database licensing growth increased 10 percent, from $537 million a year ago to $590 million. Licensing for applications rose 5 percent, from $140 million to $147 million, said Oracle chief financial officer Jeff Henley, in an interview.

Overall, the company said its database revenue has grown 20 percent to $6 billion in the last four quarters, while its applications business has grown 37 percent to $2.3 billion in the last four quarters.

"It's decent growth, not spectacular. It's a tougher environment of generating growth because we're going through the Year 2000/ERP slowdown," said Henley, referring to how businesses are spending their resources in tackling the Y2K bug.

Henley said database growth looks small on paper, but it doesn't reflect how strong the company's database sales have been lately. "This was a difficult comparison in the Americas this quarter. A year ago, we had a diastrous second quarter and one of the reasons was that in the U.S., we didn't close all our businesses and some of that leaked into Q3," he said.

As a result, database growth for the third quarter last year was tremendous, making the growth this third quarter seem smaller, he said. We're doing well and moving along. The third quarter rebound last year created unusual comparisons this year."

With the recent release of its Oracle 8i database and the upcoming April release of its Internet-based Customer Relational Management suite, Henley said he expects bigger growth this year and beyond. "We believe we're in the best product position we've ever been. And we think all that will catch hold through the year and into next year," he said.

Henley added that a penny out of the 20 cents per share earnings was the result of Oracle selling some of its shares from the initial public offering of its Japanese subsidiary.

Third quarter sales in the Americas rose 17 percent, from $995 million last year to $1.165 billion this year, while Europe, the Middle East and Africa jumped 20 percent, from $577 million to $694 million.

The Asian Pacific region is rebounding since the economic crisis hit the region a year ago, Henley said. Third-quarter sales rose 25 percent from $176 million last year to $220 million this year.

"Asia is coming back a bit, not sinking like it was for a while. They're not fully corrected there, but we think the worse is over. They've bottomed out and getting better," he said. "For many years, we had 50 to 60 percent growth there. We're not to those levels we used to go, but we can get there."

Oracle shares have doubled in the last year, reflecting renewed investor optimism about the database software maker's prospects for its Internet-focused applications software. Still, Chief Executive Larry Ellison has to prove that his company can deliver better sales growth when rivals such as SAP, PeopleSoft and Baan have stumbled as demand for their programs have slowed.

"They're in a bit of a 'show me' posture," said James Pickrel, an analyst at Hambrecht & Quist Group, who rates Oracle's stock as a "hold." "They benefit from the perception of a weaker market and their growth rates won't look as far below market growth rates as they have been."

The results, released after market close, reflect a 3-for-2 stock split on March 1. Shares of Redwood Shores, California-based Oracle fell 1.0625 to 36.875.

Bloomberg contributed to this report.