Fiscal second-quarter numbers show Oracle's core database business is likely to benefit from a revival in IT spending and the imminent Sun acquisition
Oracle's flagship database business is poised again to be a growth engine of the world's second-largest software company. Sales of Oracle (ORCL) software used to store and manage data rebounded in the quarter that ended Nov. 30, after two straight quarterly declines, according to a report released Dec. 17. New database and middleware license sales, a closely watched indicator of future revenue, gained almost 2% to $1.2 billion. The results came after database sales tumbled 22% in the preceding quarter, leading to a 5% drop in overall revenue. Sales of database licenses and support contracts contributed two-thirds of software revenue last year at Oracle, a tech industry bellwether. Oracle has spent more than $30 billion to diversify into business applications in the past five years, but the database business is still the company's core. The decline in database sales during the quarter ended in August, and uncertainty about Oracle's ability to complete its Sun Microsystems acquisition amid opposition from the European Union, have weighed on its stock price. In the most recent period, improved database sales helped Oracle's revenue grow 4% to $5.9 billion. Net income, excluding certain items, was 39¢ a share. The results exceeded Wall Street expectations: Analysts surveyed by Bloomberg expected sales of $5.7 billion and earnings of 36¢ per share. "We're back on track," says Israel Hernandez, an analyst at Barclays Capital (BCS), who has an overweight rating on Oracle's stock. The ability to sell customers new database features "is part of the growth story" at Oracle, he says. Investor Optimism
Future growth could come as Oracle converts more of its database customers to the latest version of the software, which can store and analyze vast amounts of information. Oracle's pending acquisition of Sun Microsystems (JAVA) could also provide new opportunities for database sales. Oracle plans to sell more of the software preloaded on Sun computers. "Investors are keyed in on the sequential change in the growth rate" of Oracle's sales, says Mark Murphy, a research analyst at Piper Jaffray (PJC), who has an overweight rating on Oracle stock. "They see a sequential improvement and extrapolate that forward." Wall Street considers Oracle a bargain. Oracle has a price-to-earnings ratio of 14 times its expected earnings, making it cheaper than most other software companies. Oracle shares have risen 29% this year, less than the 38% gain in the Nasdaq Composite Index. Some investors have shied away from Oracle's stock amid concern the company may not be able to complete its $7.4 billion acquisition of Sun. Shares of Oracle rose 4% in extended trading Dec. 17, after the results were released. During regular trading, the stock had slipped 24¢, or 1%, to 22.88.
Now, clouds that have hung over Oracle's stock appear to be lifting. On Dec. 14, Oracle made concessions to the European Union about how it would develop and support open-source database software called MySQL that it would gain with the Sun deal. As a result, the European Union is likely to approve the Sun acquisition in January. "We expect unconditional clearance from the European Union," Oracle President Safra Catz told investors during a conference call after the earnings report. Oracle issued financial forecasts for the current quarter, which ends in February, but plans to issue numbers that reflect the Sun deal within the month, Catz said on the call. Recovery Hopes
Oracle is the world's largest supplier of database software, which accounted for $12.8 billion of its $23.3 billion in fiscal 2009 sales. Its share of the $19 billion database market was 49% in 2008, far ahead of IBM (IBM) and Microsoft (MSFT), according to market researcher Gartner (IT). Oracle is also the second-largest vendor of business applications software, after Germany's SAP (SAP). Oracle has gained share in applications that manage sales, billing, human resources, and other operations, after its acquisition spree. The database business stands to benefit from the U.S. economic recovery, analysts say. As companies spend more on information technology projects, sales of database software will likely increase in tandem, since many applications rely on databases to underpin them. Worldwide technology spending by companies is expected to increase 4% in 2010 after declining by 8% this year, according to a Nov. 19 report by Goldman Sachs (GS). Oracle also has the opportunity to upgrade more of its 280,000 database customers to the latest version of the software, 11g. Though it was released in 2007, only 10% to 15% of customers run 11g, according to a Dec. 2 report by UBS (UBS) managing director Brent Thill, who has a buy rating on Oracle shares. Customers running the latest version become prospective buyers for an increasingly large array of add-on software that can expand databases' size and help analyze their contents. "Oracle's product line is an expanding list of database options," Thill said. Sun Benefits
The Sun acquisition presents yet further opportunities for Oracle to increase database sales. Oracle Chief Executive Larry Ellison told analysts during the conference call that Sun computers tuned to run Oracle's database could eventually provide "billions of dollars a year" in sales, plus additional support revenue. Ellison called the machines "a high-margin product for us, and a high-value product for [customers], because they don't have to spend the money on systems integration." Buying Sun gives Oracle an entrée to selling to small and midsize companies with MySQL. Ensuring that it got MySQL as part of the Sun deal lets Oracle head off any eventual threat from the software, used by companies including Google (GOOG) and Facebook to help run their Web sites. "They've used their database as a foundation to build around," says Paul Cormier, president of products and technologies at Oracle competitor Red Hat (RHT). "They don't want to let [MySQL] get out in the wild and bite them" later on.