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For many companies, a 4% rise in quarterly net income would be encouraging news in the midst of a global recession. But not at Oracle.
The main reason Wall St. analysts were disappointed by Oracle’s first quarter earnings report is that the company saw new licensing revenues plummet 17% for the period ended Aug. 31. Wall St. looks upon the new software deals as a barometer for future maintenance revenues, which has generated more than 90% of Oracle's total profits in recent quarters.
The profit that Oracle generates from the 22% annual maintenance fees and services it collects from its customers is simply staggering. I daresay the fortunes of the auto industry would be dramatically different if consumers were contractually bound to fork over annual maintenance fees to manufacturers for the upkeep on their vehicles.
Let’s try to put Oracle’s numbers in perspective. Many Wall St. analysts look upon quarterly reports from technology ‘bellethers’ such as Oracle, IBM, Intel and Microsoft as key indicators of corporate IT spending patterns. After Oracle posted its first quarter earnings on Sept. 16, several analysts groaned that Oracle’s decline in new sales demonstrated how global IT spending continues to be weak.
Most people would agree that overall technology spending continues to remain tight for many organizations whose businesses have been hurt by economic weaknesses. But there are a few inherent problems with trying to draw generalities about overall IT spending trends from earnings reports and surveys of IT decision-makers.
For starters, software and hardware spending is cyclical for many customers. As such, it’s tough to draw a line in the sand at any point in time to determine IT spending trends.
Also, it’s nearly impossible to make generalities about IT spending even among companies in the same industry. Every organization is working on different types of projects and they each set distinctive priorities on where and how much to invest in IT.
So it’s tough to make generalizations about regional IT spending (i.e. IT spending is expected to grow 3.1% in North America for the remainder of 2009) when some companies are making double-digit increases for some areas of IT spending, such as storage, while others are cutting back on spending in other categories, such as desktop refreshes.
Aggregate IT spending trends are particularly difficult to ascertain for surveys that garner 100 responses or less. How indicative can that really be?
One thing is clear: Oracle’s salespeople are struggling to sign new licensing agreements with customers. It’s impossible to guess the percentage of potential licensing agreements that were rebuffed by would-be customers over the summer that were the result of spending freezes versus dissatisfaction with Oracle’s heavy-handed approach to contact negotiations.
Still, as options such as Software-as-a-Service and open source systems continue to expand and offer alternatives to enterprise customers, it will be interesting to see how Oracle fares once overall technology spending lifts again.
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