Wall Street questions Oracle's strategy after weak Q3 sales

Oracle's severe miss in quarterly sales, dismissed by management as a blip, amplified questions on Wall Street about the business-software giant's diminishing clout in an industry moving rapidly toward cheaper Internet-based rivals.

Senior management assured Wall Street on Wednesday that a worrying 2-percent slip in new software sales was mostly due to a sales force that lacked "urgency", something to be addressed this quarter. Many analysts agreed, describing the decline in software and hardware revenues as a speed bump.

Others say the dismal numbers highlight concerns that the strategy championed by the world's No. 3 software maker, of integrating cloud software with its own hardware for greater efficiency, may not be enough to keep up with a growing number of rivals offering low-cost solutions.

Some worry that Oracle's era of fast growth and lofty margins, when it could dictate prices because of its premier market position, may be waning.

Aggressive, fast-growing companies like Salesforce.com are now offering competitive products at prices that often undercut Oracle, said Cowen analyst Peter Goldmacher.

"For a long time they've held firm on pricing for maintenance, which is their highest margin business, and they've really stuck it to their clients," said Goldmacher. "Now that you have an ever-growing raft of alternatives, more and more traditional customers are availing themselves of those alternatives."

Shares in Oracle slumped nearly 10 percent on Thursday -- their biggest single-day drop since December 2011.

Even though Chief Financial Officer Safra Catz said on Wednesday its salespeople are well on their way to signing deals they missed out on before the February quarter ended, some analysts believe the 35-year old tech company may face more serious problems as upstart rivals challenge its core business.

"Data base revenue, which has been the cash machine of the company, has changed. There are now alternative databases, as well as the cloud," said Mark Moerdler, an analyst at Bernstein Research. "That pressure is still a tiny bleed, but it is out there and the question is - is it bigger than we think it is?"

An Oracle spokesperson declined to comment.

TOUGH TRANSITION

Many on Wall Street expect Oracle to successfully adapt to a more competitive and cloud-focused market. CEO Larry Ellison and his management are known to excel in troubled times.

"It's a well managed business but it's a really tough transition. You're transitioning from one IT architecture to another and those are tough. A lot of incumbents don't get through those very well," said Patrick Walravens, an analyst at JMP Securities.

A latecomer to cloud computing, which Ellison once called "complete gibberish," Oracle has introduced its own offerings in the rapidly growing area.

Oracle's "Fusion" suite of software is geared to cloud computing. Some analysts say it is gaining wider adoption among Oracle's traditional clientele. But it competes with products offered by rivals willing to sacrifice profitability to build market share, a strategy Oracle in the past has avoided.

Companies like Salesforce, Cornerstone OnDemand, Amazon.com Inc and others offer a growing range of cloud-based services, including customer service management, human resources applications, databases and data centers. Corporate customers like that approach because it is faster to implement and has lower upfront costs than traditional software, which businesses need to install on their own computer systems.

Oracle's vision is to become a one-stop shop for cloud-computing products, offering its own applications, databases and computing infrastructure over the web. Ellison is focusing Oracle's hardware division, acquired through the $5.6 billion purchase of Sun Microsystems in 2010, on selling high-end server equipment exquisitely tuned to work with his company's software products.

But customers are also free to run Oracle's software on hardware offered by rival cloud providers or buy less expensive hardware to run their databases inhouse.

The growing ability of customers to mix and match between databases, software and hardware is making it harder for Oracle to sell its products in lucrative packages.

"The problem is, the growth of SaaS (software as a service) applications is undermining that strategy. When you subscribe to salesforce.com, you don't need to buy a database, middleware or hardware," said Patrick Walravens, an analyst at JMP Securities.

The hardware division's revenue has fallen every quarter since it closed the Sun deal. While Ellison had said in December he expected hardware systems revenue to start growing by now, the company said on Wednesday its sales were still falling.

The persistent decline of the division -- which accounts for a 10th of overall revenue -- is clamping down on the growth of a company known for powering revenue expansion largely through acquisitions.

Oracle on average is expected to grow its revenue about 1 percent in the fiscal year ending in May, according to Thomson Reuters I/B/E/S. Its revenue for the following year is seen growing 6 percent, less than the double-digit expansion it has often seen in the past.

At least two brokerages reduced their ratings on Oracle's stock following the company's quarterly earnings report. But the vast majority of analysts continue to recommend buying Oracle's stock, according to Starmine Professional, a Thomson Reuters product.

(Reporting by Noel Randewich; Editing by Marguerita Choy)