Oracle software revenue shows signs of weakness

Oracle reported another strong financial quarter on Monday, posting $4.2 billion in revenue for the second quarter of fiscal 2007, results that beat analysts estimates by 1 percent. However, there were signs in its software revenue results that the company's growth spurt on the strength of acquisitions of PeopleSoft and Siebel Systems could be coming to a halt.

The company's revenue in the same period of last year was $3.39 billion. While Oracle's most recent quarterly revenue was slightly higher than the $4.15 billion analysts polled by Thomson Financial expected the vendor to earn, earnings per share, which were $0.22, met their expectations. Net income was $1.17 billion, a 20 percent growth over the $972 million reported in the same quarter of last year.

Analysts were keeping a keen eye on software license revenue during the quarter, and results show that their concern that Oracle's revenue surge is the result of acquisitions, and not strength in its own core software business, could be valid.

Oracle's software revenue, which was $3.21 billion, grew 19 percent year over year, coming in on the low end of the company's growth expectations of 19 percent to 21 percent. Moreover, new software license revenue for the quarter was $1.21 billion, an increase of only 14 percent over the same period last year when the company had predicted an increase of 15 percent to 20 percent.

Software license update and product support revenue came in stronger, at $2.01 billion, an increase of 25 percent over the same period last year. Still, analysts likely will see Oracle's software license revenue results as a sign of weakness for the vendor.

In a statement, Oracle maintained its customary bravado, attributing its results to strong sales in all three of its core software areas -- applications, middleware and database. A statement from Oracle President Charles Phillips on second quarter results made claims that Oracle continues to steal market share from rivals in these areas.

On a conference call to discuss results on Monday, Oracle President and Chief Financial Officer Safra Catz acknowledged that Oracle missed its objective for software revenue growth in the quarter. She attributed this misstep to the company failing to execute on key deals that should have closed in the quarter but did not.

She said to alleviate the execution problem going forward, Oracle will focus on letting salespeople work in the field rather than spend time engaged in sales meetings and other activities that don't lend themselves to deal-closing. "We think additional focus ... and better pipeline management should mean better results," Catz said.

Overall, executives on the call seemed to have a lot of faith in Oracle's backlog of unfinished sales deals, which Catz said is very big, to contribute to Oracle's success in the remainder of 2007.

Larry Ellison, Oracle's chief executive officer, noted that a good portion of the deals in the pipeline are wins in vertical markets where Oracle has not traditionally played. He said retail has been a key growth area for the company, claiming that eight of the 10 largest retailers in North America now use Oracle's retail applications, whereas only one uses rival SAP AG's.

Ellison said growth in the retail sector will begin to have a noticeable effect on Oracle's software revenue. "Retail will actually move the needle," he said.

Ellison also said Oracle plans to continue its "dual strategy" of growing the company through both internal development and acquisition, a comment that may hint the company is eyeing more purchases to build out its massive software and applications portfolio.