Oracle Ends the Week With an Earnings Warning

In news that could signal a slower-than-expected software rebound, Oracle (ORCLE Quote) warned after markets closed Friday that third-quarter earnings would fall short of the consensus estimate by one penny.

Redwood Shores, Calif.-based Oracle said earnings for the quarter that ended Thursday would come in at 9 cents a share -- a penny lower than the same period a year ago and 1 cent lower than the second quarter. The consensus estimate according to Thomson Financial/First Call was 10 cents a share -- which the company had predicted in its second-quarter earnings call in December.

"While software sales in the United States and Europe increased slightly over the second quarter, that increase was not enough to offset a slowdown in Asia," Oracle CEO Larry Ellison said in a statement issued late Friday. "As companies become more confident in the economy, we expect that capital spending will increase and our business improve -- first in the U.S. and then around the world."

The software giant declined to provide further specifics about which portions of its software business were particularly soft.

Shares of Oracle had been falling all day amid rumors of a preannouncement. The stock fell 63 cents, or 3.8%, to close at $15.99 in heavy trading. Oracle became the most actively traded stock after hours as shares fell further to $14.69, according to Instinet.

Surprise

The earnings preannouncement Friday took some analysts by surprise and is likely to lead many to lower their estimates for the fourth quarter, which ends in May. The consensus estimate for May is currently 16 cents a share -- a 1-cent increase over a year earlier.

"The hurdle wasn't that high," noted Ian Morton, a senior analyst with J.P. Morgan H&Q, who had expected earnings to come in at 10 cents a share. "I think Oracle has got big numbers and big hurdles to hit. And the company has probably had a spottier track record here -- numberswise -- and they've got so many different parts of the business."

Morton has a long-term buy rating on Oracle, and his firm hasn't done any business with the company.

"It's surprisingly weak. We were below consensus in terms of our numbers, and it looks like they are coming in a lot weaker than that," said Jon Ekoniak, a senior analyst at U.S. Bancorp Piper Jaffrey, who has a market perform rating on Oracle. "I think some of it is the environment, some of it is Oracle."

Ekoniak pointed to Oracle's applications business as one example of company weakness. "We're hearing some good things about some of its competition -- SAP (SAP Quote) and PeopleSoft(PSFT Quote)," he said. In a research note released Friday morning, Ekoniak said many customers are still reporting that Oracle's applications product is still suffering from bugs.

Oracle has been facing increasing competition in its core database market from IBM(IBM Quote), making it more sensitive to price. Ekoniak's estimate of fourth-quarter earnings coming in at 15 cents a share was already below the street consensus, but now he expects to revise downward even more.

Because Oracle is the first enterprise software maker to report earnings this year -- on March 14 -- the company may provide a preview of what to expect across the sector, Ekoniak said in his research note. Indeed, Friday's announcement comes exactly one year after a previous one by Oracle that foreshadowed the industry's downward spiral.