Oracle: Beating Indigestion

Larry Ellison has already shown that the software giant can integrate acquisitions. And he's got the numbers to prove it again

by Aaron Ricadela

As Oracle prepared to release third-quarter fiscal results Mar. 20, investors freighted the report with expectations. The software maker was trying to fix sales missteps that hurt results in the prior period, while folding in acquisitions designed to fight SAP for market share. It would also offer clues as to whether a slowdown in corporate technology spending is taking a toll at Oracle (ORCL).

Oracle blew past expectations on all counts, propelling its shares 3.4% in extended trading. Net income for the quarter ended Feb. 28 jumped 35% to $1.03 billion, or 20¢ a share, and revenue grew 27% to $4.4 billion. Excluding the cost of stock options, both figures exceeded analysts' forecasts.

Sales of new software licenses—a closely watched measure of how much fresh business Oracle books—also climbed 27% to $1.39 billion, up from $1.1 billion a year ago and topping the high end of Oracle's prediction. "The company has never been in as good shape," Chief Executive Larry Ellison said during a conference call with analysts Mar. 20. "We've never executed so well." Oracle stock had risen 37¢ to close at $17.55.

Shopping Spree

The results, along with a bullish outlook for the fourth quarter, allay concerns that a market downturn will cool companies' appetite for information technology and appear to validate Oracle's strategy of expansion through acquisition. "They're proving the strategy is working," says Peter Kuper, an analyst at Morgan Stanley (MS). "They're offering customers more functionality from one vendor." Oracle has spent nearly $24 billion over the past three years to buy some 30 software companies.

After a four-month respite, Oracle resumed its acquisition spree on Mar. 1, buying business-intelligence software maker Hyperion Solutions (HYSL) for $3.3 billion (see BusinessWeek.com, 3/2/07, "Oracle: Consolidation Catalyst?"). Now, with key acquisitions PeopleSoft and Siebel Systems under its wing for a full year, and Hyperion poised to open a new market for data-analysis software, the question on Wall Street minds is whether Ellison & Co. can sustain the growth as they try to meld disparate products next year.

Oracle's applications business—which includes software for managing payroll, inventory, and manufacturing schedules—fared especially well in the quarter, as sales of new licenses shot up 57% to $423 million. Database license sales rose 17% to $959 million. After Oracle's new license sales during the quarter ended Nov. 30 fell short of forecasts, investors questioned whether Oracle was choking on its buyout binge. "With yet another quarter of solid application performance, they're proving anyone who was worried about that to be wrong," Kuper says.

Fusion Forecast

Oracle did that at least in part by making some tweaks to its sales strategy. The company cut the amount of time sales staff spent in meetings and other activities that didn't involve selling. The changes paid off, Oracle President and Chief Financial Officer Safra Catz said on a conference call: "Everyone [is] focusing on what they need to be doing."

Now, the company needs to prove that an upcoming suite of business applications called "Fusion," which aims to combine the best aspects of PeopleSoft, Siebel, and Oracle's own software, can spark future growth. It also needs to deliver on its promise of 10% to 14% revenue growth during its fourth quarter ending in May, at a time when a downturn in worldwide stock markets is raising questions about companies' willingness to spring for new computers and software (see BusinessWeek.com, 3/12/07,