UPDATED 26 March 2008
Overall Q3 results for Oracle (MGI: 2,210) have been viewed as somewhat disappointing. Given the substantial number of acquisitions the company has done over the past several years, not to mention Oracle’s broad international exposure, many investors have come to think the company is fully insulated from the risks of an economic slowdown. Obviously this was a flawed assumption.
We believe looking at Oracle’s MGI Index performance helps put the results into better perspective. As we have written on previous occasions Oracle has one of the highest MGI X index scores for applications software vendors (“ASVs”). Oracle’s score currently stands at 2,210 as of the February quarter, and Oracle’s rank was #2 out of the 65 ASVs we track. While Oracle has an excellent score, the Change Vector (which we believe performs as something of an intermediate leading indicator of future results) was modestly negative in the August and November quarters (see chart below). The February quarter, although disappointing to investors, did show a return to a positive Change Vector reading which we believe bodes well for the May quarter performance.
Given that Oracle was closing the quarter during a period of extraordinary volatility in the financial markets, coupled with an extremely challenging year-ago comparison, we would not read too much into the numbers relative to where Q4 results will be. Likewise, our checks during the quarter suggested that there could be some delays in closing the business, particularly in key verticals like retail and financial services. The most pronounced area of weakness in the quarter was the modest applications’ license growth. This should not be terribly surprising given the extraordinary year-earlier growth as well as the fact that applications deals tend to be bigger and carry more associated expenses of deployment. We had also heard that Oracle had taken steps to incrementally tighten spending on travel and discretionary expenses.
We view the strong earnings growth that was in large part driven by continued significant improvements in operating profitability as evidence of both the leverage of Oracle’s increasing scale as well as the effectiveness of the company’s internal reporting systems. Perhaps as important, management’s comments regarding the strong sequential growth in its pipeline (not quantified) indicates the future remains bright. Management on balance is quite confident and it appears to us that Q4 could very well upside estimates.
[Due to a typographical error, this post has the updated and correct MGI X score for Oracle - 2,210.]