THE WEEK AHEAD: Oracle''s turn to disappoint

Wall Street will learn just how bad things went for Oracle in the waning days of its third quarter when the database software giant next week unveils its quarterly results and guidance for the rest of its fiscal year.

After watching Intel (Nasdaq: INTC) issue its predictable profit warning this week, investors have become numb to the prospects of sagging sales and earnings from technology bellwethers.

Oracle (Nasdaq: ORCL), which reports its third-quarter numbers next week, surprised some analysts at the 11th hour of its second quarter when it warned that sluggish sales of its flagship database software would result in lower sales and earnings in the quarter.

Oracle executives, apparently just as surprised as investors, said senior executives nixed big orders at the last minute in response to the deteriorating economy.

First Call consensus now expects Oracle to earn 10 cents a share in the quarter, down from its original estimate of 12 cents a share. Sales are expected to check in at around $2.66 billion.

In a conference call with analysts two weeks ago, Oracle Chief Executive Larry Ellison said sales were strong in December and January but that many companies delayed purchases of Oracle products during the last few days of the quarter.

"It's disappointing. A bunch of deals were approved at the vice president and senior vice president level, but once it got to the CFO and CEO level, they were pushed off," Ellison said at the time. "We have a lot of nervous senior executives looking at this economy and being very cautious. They wanted to wait 30 to 60 days to get a read on the economy."

Oracle executives said database software sales for its third quarter were flat to slightly negative as compared to the same quarter last year, while applications sales grew 50 percent.

Back in December, Oracle predicted database software sales would grow 15 percent to 20 percent year-over-year in the third quarter and that application sales would grow 75 percent.

Some analysts were expecting a warning from Oracle though not until the May quarter.

Looking ahead
Oracle's outlook was cut by both Banc of America and Goldman Sachs just a few days before the official warning.

Banc of America's Bob Austrian said he expected Oracle's third-quarter applications sales to improve 66 percent from the year-ago quarter to $330 million but warned that the fourth quarter might be more challenging.

"Our concern for Oracle focuses more on the May quarter.where even our lowered applications revenue estimate of $640 million and database revenue forecast of $1.47 billion seem at risk given the macro (economic) environment," he wrote in a research note in late February.

While Goldman Sachs' Rick Sherlund said Oracle's applications business is "early enough in its product cycle and market adoption to continue to meet or exceed Street expectations," he lowered his database growth rate for the current quarter to 16 percent from 13 percent. He predicted database sales improving 16 percent in the fourth quarter from the same period last year.

Last month, Morgan Stanley Dean Witter analyst Chuck Phillips questioned how long Oracle could sustain its database momentum, given the fact that at least 30 of Oracle's sizable dot-com database customers had gone out of business. Phillips estimated that 10 percent to 12 percent of Oracle's database license revenue came from dot-coms last year.

Last quarter, Oracle pocketed $623 million, or 11 cents a share, on sales of $2.7 billion.

The stock fell below $17 a share Friday, well off its 52-week high of $46.44 set in August. Clues from the Greenspan
Investors will also be looking for clues from the Federal Reserve Board ahead of its March 20 policy meeting.

After seeing a full-point cut in short-term interest rates in the first five weeks of this year, traders are holding out hope for at least another half-point reduction later this month.

While technology stocks seemed to be reinvigorated by the earlier reductions, those gains have evaporated in the past month.

Federal Reserve Chairman Alan Greenspan recently told Congress that the slowdown hitting the U.S. economy "has yet to run its full course." But he also hinted that it hasn't slipped enough to prompt another interest rate cut, saying the Fed had responded to the problem.

It didn't help that the Labor Department reported Friday that the nation's employers created 135,000 jobs in February, well ahead of analysts' forecasts of about 75,000. The data, indicating strength in the economy, might relieve some of the pressure on the Federal Reserve to lower interest rates as a way of stimulating business activity.

Analysts say the market now expects the Fed to lower rates by a quarter point, or perhaps not at all, when it meets March 20. Wall Street had been anticipating a half-point reduction.

Investors should have a better idea of the situation, including how much the Fed will cut rates, by this time next week.