Oracle’s Mixed Message

cenerpAn investor holding Oracle shares since the beginning of the year is sitting
on a 12% gain. That’s not bad, especially considering shares of software
bellwethers Microsoft and SAP are down in the same period. Shareholders hoping
for further appreciation will have to weigh Oracle’s bullish outlook for the
current quarter against the disappointing fourth-quarter U.S. sales it reported
June 26.
Much of what Oracle (ORCL) reported gave Wall Street cause for optimism. Net income
rose 23%, to $1.6 billion, for the period ended May 31. Per-share earnings,
excluding certain nonrecurring items, exceeded analysts’ estimates by 2￠.
Revenue soared 20%, to $5.83 billion, exceeding Wall Street expectations of $5.6
billion. And new software license sales, a key measurement of growth, were up
17%, to $2.48 billion, also outpacing Wall Street estimates. "The story for the
year is we grew all our businesses faster than the market," Oracle Co-President
and Chief Financial Officer Safra
Catz said during a conference call discussing the results.
Flat U.S. Sales
Catz also issued a surprisingly high call for the first quarter, which ends
in August, predicting that new license sales would shoot up 20% to 30% and that
total revenue would increase 19% to 21%, compared with a blockbuster first
quarter a year earlier.
But investors balanced the rosy outlook with what looks like leveling off of
U.S. sales in areas Oracle has been beefing up through acquisitions. Oracle,
long a powerhouse in sales of database software that helps companies manage
large storehouses of information, has been on a buying spree aimed at nabbing
share from Germany’s SAP (SAP) in other areas—specifically, applications used by businesses
for such tasks as balancing books, tracking inventory, and running human
resources.
Oracle Chief Executive Larry
Ellison has spent more than $20 billion since January, 2005, to acquire 31
software companies, including PeopleSoft and Siebel Systems (see
BusinessWeek.com, 3/21/07, "Oracle: Beating
Indigestion"). Oracle’s fourth-quarter sales of new business applications
licenses, a predictor of future sales, rose just 5% in the region that includes
the U.S., to $415 million. Excluding Oracle’s $3.3 billion acquisition of
Hyperion Solutions on Apr. 23, U.S. sales were essentially flat. "That’s where
people are a little concerned," says Peter Kuper, an analyst at Morgan Stanley
(MS). Meanwhile, sales in Europe and Asia grew much faster.

License Sales
During the conference call, Ellison blamed slow U.S. applications sales
growth on a tough comparison with the fourth quarter of 2006, when Oracle
reported particularly strong results.
Oracle’s overall new license sales for applications rose 13%, to $726
million. UBS (UBS)
analyst Heather Bellini said in a research note that new applications license
sales fell short of her expectation for 14% growth, and she wants to see more
numbers from Oracle’s recent acquisitions to figure out how quickly it’s picking
up share from SAP. Bellini expects SAP to post 10% new license growth for
applications in its current quarter.
Oracle announced five acquisitions during the fourth quarter, including
Hyperion Solutions, a maker of business-intelligence software, and Agile
Software, which helps companies manage product portfolios (see BusinessWeek.com,
3/2/07, "Oracle:
Consolidation Catalyst?"). Oracle said Hyperion contributed $43 million in
fourth-quarter sales, but there’s concern on Wall Street that chief information
officers signed discounted multiyear contracts with Hyperion before the
acquisition closed, leaving Oracle with less green field now. "The big question
around this acquisition will be, did Hyperion drain the pipeline?" says Brent
Thill, director of software research at Citi (C), in an interview
earlier in June.
Tough Targets
Concerns and disappointments aside, Oracle’s first-quarter outlook suggests
strong prospects for deals even after the fourth-quarter scramble by sales staff
to close contracts and earn commissions. "That should give investors greater
confidence that 2008 looks like a good year," Kuper says. And Oracle’s 46%
profit margins from operations are among the highest in the software industry.
"There’s a lot for investors to feel good about," Kuper adds.
Catz said the company’s sales prospects for the first quarter "look
fantastic." For example, Oracle is working on a large deal with AT&T (T) that could span
database software, business applications, and other products, according to an
executive with knowledge of the talks.
For its 2007 fiscal year, Oracle’s revenue increased 25%, to $18 billion, and
net income rose 26%, to $4.27 billion, helped in large part by its database
business. Oracle’s share of the $15.2 billion database market widened to 47% in
2006, according to a June 18 report from market researcher Gartner (IT). IBM (IBM) was second, with
a 21% market share, and Microsoft (MSFT) held about 17% of the market. Oracle plans to introduce a
new version of its database software, version 11g, on July 11.
Ellison has promised investors 15% sales growth and 20% increases in profits
for the next two years, and Oracle will need to keep acquiring companies to meet
those goals, since Wall Street is modeling slower revenue growth. "I expect the
pace to continue," Ellison said. And Oracle’s business is generating the cash
he’ll need to keep the acquisition machine revving. Operating cash flow during
the quarter increased by $1 billion, to $5.5 billion. "We think it’s a number
that’s an interesting measure of the progress we’re making," Ellison said. For
Oracle’s stock to continue its gains, it will have to make some progress in U.S.
applications sales, too.

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