Oracle’s Quarter Sends a Message, Adobe’s a Warning

Oracle and Adobe both announced their earnings after the bell yesterday, and both companies were being closely watched as possible indicators of the overall health of the tech sector in what’s pretty obviously at least an economic hiccup on the way to recovery.  Both the companies reported quarters that included upside surprises, sending both stocks up in after-hours trading.  The details of the two were different, and of course so are the implications for the industry.

Oracle beat the estimates in profits and their license numbers did particularly well, which suggests that database and application software sales are still strong among enterprises.  That would be a key metric in my view because these are the two software components most directly linked to corporate productivity, and thus the two that would be most likely to reflect “project” spending rather than just orderly enhancement of IT budgets.

The hardware end of the business, acquired with Sun, was the weak point in the numbers; hardware sales dipped for the quarter.  Oracle said that it would be focusing on profitable “appliances” more in the future, which would be likely to improve both sales and margins on hardware.  It’s also, in my view, a reflection of a basic truth, which is that servers are a commodity item where it will be difficult to sustain margin and profit growth in the future.  Take note, HP!  Oracle’s decision to de-emphasize the x86 models in favor of Sparc models is a further indication of a flight from a commodity space.  Powerful Sparc appliances are likely the best strategy against the SAP/IBM and SAP/HP combinations too.

Adobe actually had a weak quarter but offered high-end-of-the-range guidance.  The highlight may have been the fact that CS5.5 revenues were consistent with the run rate for CS3, the last of the Creative Suite versions to do really well in the market (it came along before 2008).  However, I’m not sure that the Street is getting the full picture here.  I don’t see much of an indication that Adobe is pushing Creative Suite beyond the base audience it enjoyed with CS3, meaning that it’s not selling new players.  Moreover, I see little sign that Adobe is capturing a growing share of the consumer editing space with its various Elements products.  There again they seem to be upselling within the same audience.  Acrobat was perhaps its greatest overall success, the only place where it demonstrated it might be gaining market share in a convincing way.  Acrobat here means the “professional” or authoring piece of the PDF process.

Adobe’s other long-term problem is HTML5 and the flight from Flash.  Adobe’s professional video tools and web tools have benefitted from the dominance of Flash in web video, and it’s pretty likely that dominance is coming to an end.  Microsoft’s decision to reduce Metro’s dependence on plugins mirrors Apple’s moves, and while Android will surely continue Flash support to tweak Apple’s nose, the handwriting is on the wall here.  HTML5 will open up web video to competitors in a big way, and just having HTML5 capability on what was once a pure Flash server product isn’t going to save Adobe here.  Adobe is pushing a new version of Flash and AIR, its rich media environment, but I wonder if AIR can withstand the tablet revolution.






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