Investors who thought a spending recovery arrived in the software sector got a
dose of reality Friday when
reported disappointing software revenue.Analysts are divided over whether Oracle's miss was company-specific or the victim of tight IT spending. But a survey by Goldman Sachs on Monday bolstered the argument that tech spending remains tight, with that ever-elusive recovery moving farther out yet again.
Almost half of the 100 CIOs surveyed in mid-to-late August are postponing expectations for a pickup in tech spending to the second half of 2004 or beyond, Goldman found. Expectations for 2003 are in a holding pattern, and the outlook on timing and slope of a spending recovery is incrementally more tempered, Goldman reported.
"For now, the most prudent assumption is for a very modest but not miraculous improvement," the report said.
In a separate note highlighting the survey's software findings, Goldman Sachs analyst Rick Sherlund suggested that Oracle's results may not be symptomatic of the overall sector. "Oracle's recent results were not a positive data point, but their first fiscal quarter is often impacted by sales execution issues, so we look for more encouraging indications as September quarter results come in for the broader software sector," Sherlund wrote. (Sherlund does not have a rating on Oracle, but his firm expects to receive or intends to seek compensation for investment banking services from Oracle in the next three months.)
Oracle executives blamed their miss on a sales-force reorganization, while analysts said the upcoming release of a new database product also could have prompted some customers to postpone purchases. But tight IT spending may be another culprit, some suggested.
"Poor sales execution and a tepid IT spending environment were responsible for the weak results," Prudential analyst Brent Thill wrote in a note Friday. "Oracle's results suggest a continued lackluster spending environment for big-ticket software purchases by enterprises. We look for modest improvement going forward." Thill has an overweight rating on Oracle, and his firm doesn't do investment banking business.
Goldman made a similar argument about CIOs' willingness to make large investments this year. The firm found that expectations for growth in capital spending in 2003 remain below projections for growth in IT budgets. (Capital spending includes spending on only new equipment and software, while IT spending also includes staffing costs, services and depreciation.) The lower expectation for capital spending growth, appearing for the second consecutive survey, reinforces anecdotal evidence that CIOs are still reluctant to invest in new, large-scale projects, Goldman concluded.
Pricing pressure, which some analysts suggested also hampered Oracle's results, is showing the most promising evidence of bottoming so far this year, the Goldman survey found. In the software sector, 49% of respondents indicated price discounting is still increasing, down from 62% in June, Sherlund wrote in his supplementary note on the survey. "Pricing likely remains difficult for software vendors, but maybe a bit less so," he concluded.
In contrast to Oracle's disappointing results Friday, Goldman found that the company's customers' appetite for database capacity continues to show gradual improvement. About one-third of Oracle customers surveyed said they anticipate adding additional database capacity during the next year.
"The Goldman Sachs Software team believes that there may be some pent-up demand for database capacity, which should benefit Oracle as IT spending conditions improve," the report said. In addition, Oracle's upcoming release of a new database and add-on features should give the company the opportunity to sell to its installed base of customers, the report said.
However, on CIOs' priority list, database software fell down to the middle tier after a move up to the top tier in June. This could reflect capacity additions typical in Oracle's fiscal fourth quarter, which ends in May, Sherlund wrote.
Enterprise portal and integration software also dropped in rankings, which could reflect the increase in bundling with application server sales. Customer relationship management and enterprise resource planning software held ground in the middle rankings, reflecting broader stabilization.
Security software showed no sign of budging from the top of CIOs' priority list, although the stated need for VPN and firewall products declined in a move that was inconsistent with demand checks.