Oracle Excels amid a Tough Outlook

The software maker's results beat analyst expectations. But will its strategy work in the face of slowing IT spending?

by Aaron Ricadela

The last time software maker Oracle reported quarterly results, investors got an unpleasant surprise. Sales fell short of expectations, Oracle's stock fell, and Wall Street questioned the company's ability to shrug off a slowdown in technology spending. The doubts proved to be short-lived.

Oracle's (ORCL) business snapped back in the most recent quarter, which ended May 31, typically its strongest of the year—though a tempered forecast for the current period curbed investor enthusiasm. Fourth-quarter revenue rose 24% and profit soared 27%, beating analysts' expectations on both counts, Oracle reported June 25. And sales of new software licenses, an indicator of future sales, surged 27%, vs. Wall Street's expectation of 16% growth.

"Profit Machine"

Executives said Oracle's purchases of more than 40 software companies for more than $25 billion in the past three-and-a-half years helped it widen share in the market for business applications and let it sell customers an ever broader portfolio of products. The $8.5 billion acquisition of middleware vendor BEA Systems closed Apr. 30. "We don't think that our strategy is in any way running out of gas," co-President and Chief Financial Officer Safra Catz said on a conference call with investors.

But Catz warned investors that growth in the historically slow quarter that ends in August would pale in comparison to a year earlier. Oracle expects new license sales to rise 10% to 20%, compared with a 35% increase in the same period a year earlier, when the company landed several large deals, including with Ford (F) and Cisco Systems (CSCO). Oracle shares lost more than 3% in extended trading after the report was released. They had risen 32¢, or 1.4%, to 22.55 in regular trading.

Despite Catz's cautionary note—and the prospect that companies could cut technology spending ever further in the second half of the year amid a U.S. slowdown—Oracle's stock is shaping up as one of the tech sector's better buys right now. The company collects nearly half its revenues from technical support, or "maintenance" fees, and consulting contracts for its software, which generates lots of cash that's either booked as profit or used to acquire more companies. That, in turn, feeds new license sales, which create future maintenance streams. "Oracle, given its size, is a profit machine," says UBS (UBS) analyst Heather Bellini, who has a buy rating on Oracle. "That's one reason we think Oracle's such an anchor stock. …There's a lot more predictability around their revenues and their earnings growth" than for other technology companies, she says. "License revenue is the sexy part everyone focuses on, but the profitability lies in the maintenance stream."

Acquisitions Lead the Way

Net income for the quarter hit $2.04 billion, or 39¢ a share, vs. $1.6 billion a year ago. On a non-GAAP basis, Oracle earned 47¢ a share, beating Wall Street's expectation of 44¢ a share. Sales rose to $7.24 billion, exceeding analysts' expectations of $6.86 billion. New license sales of business applications, which companies use to manage inventory levels, bill customers, and plan manufacturing schedules, surged 36%, to $989 million, following a disappointing third-quarter performance (BusinessWeek.com, 3/27/08).