What Oracle's earnings miss means

Customers are calling the shots in the business software market, demanding discounts that companies may not otherwise want to give.

By Jonathan Berr Dec 21, 2011 2:43PM
Shares of Oracle (ORCL) plunged nearly 14% Wednesday after the software company reported its worst earnings shortfall ever. Tech investors are nervous -- with good reason.

The company said many of the deals it expected to close in the quarter did not, even after it added 1,700 salespeople in the first half of the year. Revenue at Oracle rose 2% to $8.8 billion, and new software license revenue -- a critical metric -- rose just 2% to $2 billion. 

Post continues below.
Not surprisingly, sales and marketing expenses rose 11% to $1.7 billion, representing 19% of revenue, up from 18% a year earlier. Customers are driving hard bargains, and though margins have held up, that may be tough to continue.

In an earnings call with investors, Oracle's chief financial officer said some expected deals suddenly required last-minute additional approvals. "As a result, we are putting in place better deal management so that we have the time and the approvals necessary to take this into account," Safra Catz added.

Red Hat (RHT) shares also tumbled after the provider of software based on the free Linux programming language gave disappointing guidance for the current quarter. Shares of Salesforce.com (CRM), which added more than 1,000 employees this year, also slumped after it reported that customer billings, a critical sign for growth, trailed some analysts' expectations.

Selling software, hardware and related services may get more difficult in 2012. Corporate technology spending is expected to increase by 3.9% to $2.7 trillion, down from an expected 5.9% increase in 2011, according to Gartner. That means the balance of power in technology has swung to customers' favor. To win business, Oracle CEO Larry Ellison and his rivals have to channel their inner Monty Hall and play "Let's Make a Deal."

Ellison will do what it takes to close a sale, even as customers squeeze Oracle for concessions such as steep price cuts along with free upgrades and service. Buyers can demand even better deals if they agree to be a reference customer and tell peers about the awesomeness of whatever product or service Oracle and other tech companies want to sell. Occasionally, reference customers are used to bolster the credibility of corporate press releases. What investors and the public don't realize is that those clients exact a price in exchange for their kind words.

There are many bargains in the tech sector. Unfortunately, they are in software, services and hardware. Stocks of the companies that sell those to business customers will be pressured for some time.

Jonathan Berr owns no shares of the companies listed.
0Comments

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
284
284 rated 2
461
461 rated 3
671
671 rated 4
628
628 rated 5
618
618 rated 6
615
615 rated 7
495
495 rated 8
347
347 rated 9
115
115 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
DYNDYNEGY Inc10
TAT&T Inc9
VZVERIZON COMMUNICATIONS9
EXCEXELON CORPORATION8
AAPLAPPLE Inc10
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.