Oracle's Mixed Message

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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.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.