Oracle cuts near-term outlook

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Oracle met analysts' lowered third-quarter expectations and told them to reduce their fourth-quarter forecasts.

"We are assuming a somewhat worse economy" in the fourth quarter ending in May, CEO Larry Ellison said Thursday evening in a conference call with analysts. "The truth is we don't know. We just don't know. Whatever the economy does, we'll do."

After market close Thursday, the business software vendor reported third-quarter net income of $583 million, or 10 cents per share. That was in line with the mean estimate of 30 analysts surveyed by earnings tracking firm First Call, and in line with Oracle's warning two weeks ago.

Prior to Oracle's caution, First Call consensus was predicting a profit of 12 cents per share for Oracle's third quarter, which ended in February.

Shares of Oracle (Nasdaq: ORCL) traded at $15 in after-hours activity on the Island ECN, immediately following the release of quarterly results. Oracle fell $1.38 to $14.69 in Thursday's regular trading ahead of the earnings report.

Oracle is planning for flat revenue growth in the fourth quarter, which would result in earnings of 15 cents per share, Chief Financial Officer Jeff Henley said. First Call consensus was predicting a fourth-quarter profit of 22 cents per share, with a revenue increase of roughly 14 percent year-over-year.

But company executives said their ability to accurately predict near-term results is low.

Cautious forecast
"I'm not even suggesting this is good guidance," Henley said. "I'm just saying this is how the model works."

The company remains at the mercy of the U.S. economy, analysts said. No one can say for sure how the economy will look near the end of Oracle's current quarter, said Epoch Partners analyst Mark Verbeck, adding that corporate software vendors such as Oracle typically close most of their sales in the last few weeks of a quarter. "It all depends on how people feel in May," he said.

Oracle is being cautious with its forecast, analysts said.

"You just didn't hear a lot of good things coming out of the conference call," said Jeffery Van Rhee, analyst with PMG Capital. "I think they just threw up their hands and said, 'We have no idea.' "

Being the dominant player in the field for database software, which generates the bulk of Oracle's revenue, means the company is especially vulnerable in that field, Verbeck said. "When you look at databases, where Oracle basically is the market, there's not a lot they can do," he said.

Despite the slowing economy, Oracle can maintain its current profit margins, executives said. Oracle posted a third-quarter operating margin of 33 percent.

Ellison left open the possibility of layoffs, as the company tries to keep costs down. However, Oracle already has been gradually lowering its headcount over the past couple of years, Ellison said.

"There's no organization that isn't being asked to do more with less," Ellison said. "With the sole exception of R&D, Oracle should be reducing headcount in virtually every area."

Revenue and the dot-com collapse
Third-quarter revenue rose 12.5 percent year-over-year to $2.7 billion. Sales in the United States dropped 4 percent, compared to 34 percent growth in the first and second quarters, Henley said.

Database software revenue increased 6 percent to $823 million. Sales of application software, which generally has been pegged as the key to Oracle's long-term growth, grew 25 percent to $249 million. Analysts were hoping applications revenue would rise 50 percent year-over-year.

While executives blamed the bulk of the quarter's disappointment on the U.S. economy, one other factor that hurt was the collapse of the dot-com industry, Henley said. Oracle's revenue from pure Internet companies fell 66 percent year-over-year; if dot-com business is excluded, Oracle's third-quarter revenue rose 9 percent from the year-ago period.

There's not much Oracle can do while the economy remains slow, Van Rhee said. "I think they just have to ride it out," he said. "I don't see anything that's Oracle-specific going on."