Oracle: What Market Malaise?

The software maker beat analysts' expectations last quarter and quelled concerns—for now—that economic woe will cause companies to curb IT spending

by Aaron Ricadela

As investors looked to Oracle for any signs the summer's market turmoil might crimp tech-sector sales, the software giant put at least some concerns to rest. Oracle (ORCL) sailed past analysts' estimates for sales, profit, and orders for its August quarter and issued an upbeat forecast for the period that ends in November.

Oracle's fiscal first-quarter results include a 26% gain in sales, a 25% jump in profit, and the largest advance in new order bookings in a decade. Numbers like that could augur a bullish start to the string of tech earnings reports due in October. Updates from Intel (INTC), IBM (IBM), Microsoft (MSFT), and SAP (SAP) are all on tap. Investors are looking for signs that a volatile August stock market and a credit and housing crisis could spill over into technology spending. But with corporate software buying packed into the last three months of the year and information technology budgets set through the end of 2007, Wall Street may have to wait a bit longer for a clear picture.

Acquiring "Wow" Results

For now, Oracle appears to be turning the customers it's gained through a string of acquisitions into a wellspring of profitable growth. Net income for the quarter was $840 million, vs. $670 million a year ago. Earnings per share came in at 22¢, excluding the cost of stock options, beating analysts' estimates by a penny. Revenue was $4.53 billion, vs. $3.6 billion in the year-earlier period, an especially strong one for the company. Perhaps more important, sales of new software licenses, a harbinger of future revenue, leaped 35%, to $1.09 billion. Sales of new licenses for applications, the software for specific business tasks such as bookkeeping, were up 65%.

Analysts had expected $4.34 billion in revenue and $992 million in new license sales. "It was an all-around spectacular quarter for us," Chief Executive Larry Ellison said during a conference call after results were released Sept. 20. Oracle expects 15% to 25% growth in orders for the current quarter, which began Sept. 1. That forecast also beat analysts' expectations. "I'm a little giddy when I see these numbers," says Goldman Sachs (GS) analyst Sarah Friar. "Oracle is one of the first big bellwethers to report since the whole credit crunch. It's a 'wow' result."

Oracle has spent about $25 billion to acquire more than 30 companies in the past three years. It's using those purchases to wring profitable sales that themselves deliver recurring revenue from tech support, Friar says. As evidence, she points to Oracle's $2.7 billion in first-quarter net cash from operations, up from $1.6 billion a year earlier. "Cash is king," she says. "That's what should drive the stock higher." Shares of Oracle rose 20¢, or less than 1%, to $21.04 ahead of the report. In extended trading, the shares were 10¢ higher.

Across Industries and Above Margins

The hope for Oracle investors in recent years has been that as the company acquires makers of applications software for managing human resources, finance, and other operations in a broad range of industries, customers who buy those products would also buy Oracle's flagship database software, which works in conjunction with them. Detractors of the stock have warned that eventually the costs of supporting customers of the new software would catch up with the company.

That hasn't happened so far. And Oracle is starting to capitalize on acquisitions of companies that make specialized software aimed at such industries as telecommunications, retail, and utilities, Ellison said. Companies in those areas already buy Oracle databases, the programs that help companies store, search, and analyze vast reams of data, and middleware, the software that connects disparate applications. "Now we want to sell them this industry-specific software," he said. "They're going to be a bigger and bigger amount of our business every year."