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Oracle Seeing Effects of War

Firm says turnaround unravels on a 4% drop in new software sales as Mideast tensions grow. It warns that the trend could accelerate.

March 19, 2003|Joseph Menn | Times Staff Writer

Oracle Corp. blamed major customers' unease over the impending war in Iraq for third-quarter declines in sales of new software, and it cautioned that the trend could accelerate in the coming months.

Oracle's profit in the three months ended Feb. 28 rose 12% to $571 million, or 11 cents a share, from $508 million, or 9 cents, a year earlier. The big maker of database programs said overall sales increased for the first time in two years, by 2% to $2.31 billion, including a 5% boost from currency fluctuations.

Closely watched sales of new software licenses declined 4%, and Oracle executives said that what had been shaping up as an excellent quarter began unraveling in February as concerns about the Middle East grew.

"We were thinking this looks like a big-time turnaround, and then we saw a precipitous falloff in February," Oracle Chief Executive Larry Ellison said. "In the Middle East we saw a huge falloff, directly as a result of the war."

For the company's fiscal fourth quarter, Chief Financial Officer Jeff Henley guided analysts down from previous projections, saying revenue may fall as much as 6% from a year ago or increase by as much as 2%. Earnings per share should come in at 12 to 15 cents, with new licenses falling as much as 15% or gaining as much as 5%.

In the third fiscal quarter, license renewals and product support rose by a combined 16%, reaching 43% of Oracle's total revenue. The biggest declines in new deals came in the market for very large contracts worth $5 million or more.

"It finished as people feared," said S.G. Cowen analyst Drew Brosseau. "The ultimate numbers were a little bit light at the top line." Brosseau owns no Oracle shares, his bank does no business with Oracle, and he rates the stock "market perform."

Oracle shares, which have held on to most of their value for the last year, dipped in after-hours trading to $11.48 after the earnings release. In regular Nasdaq trading, they fell 10 cents to $12.25.

Redwood City, Calif.-based Oracle is one of the largest companies to report financial results since the war became imminent, and its grim outlook could foretell poor results across a range of industries.

Ellison and Henley said that although it was hard to sort out which customers were postponing planned purchases solely because of a possible conflict in Iraq, greater hesitancy was obvious and far-flung.

"It might be what they paid filling up their SUV in the morning, but they just don't feel like signing that purchase order," Ellison said.

Henley said sales closings fell short of expectations in every region, a rare occurrence: "We just saw widespread slippage around the world."

This month, market research firm IDC reported that Oracle's leading share of the $13-billion database market had slipped in 2002 to 39.4% from 41.7% as IBM Corp. and Microsoft Corp. gained.

Ellison maintained during a conference call for investors that Oracle is now gaining share from IBM.

Still, Oracle has been working hard to capture more share in related markets for software applications that use databases to perform other tasks, including handling commercial transactions.

New sales of such applications fell 5% in the third quarter, much better than previous drops of as much as 40% a year ago.

"So far, the trajectory seems to be in the right direction," Morgan Stanley analyst Charles Phillips said. "Anything can happen in this economy, but in the context of a tough environment, they seem to be pushing it in the right direction." Phillips owns no Oracle shares and rates them "overweight." Morgan Stanley has done banking business with Oracle.

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