Oracle: Weathering the Storm
By Jonathan Rudy
Amid the doom and gloom surrounding technology companies during the second quarter of 2001, there was one particular bright spot. In June, Oracle (ORCL ) surprised investors with word of better-than-expected results for its fiscal 2001 (May) fourth quarter, and more importantly, a brighter outlook for its business going forward. Investors reacted quite favorably to the news, as there had been a great deal of concern in the marketplace over how business had been going at Oracle in the midst of the challenging economic environment.
For the fiscal year ended May 31, 2001, Oracle achieved revenue growth of 7%, with license revenues rising 6%. Operating earnings increased 23% over the same period, primarily due to cost cutting efforts enabled through the use of Oracle's own software. The company was able to improve its operating margin to 34.8%, from 30.4%, year over year. While these numbers may seem pale in comparison to technology earnings in recent years, we believe that the context of these results must be considered in order to appreciate the relative strength of the company's results.
With the dramatic slowdown in technology spending, numerous firms in the industry have had to dramatically slash revenue and earnings targets. The fact that Oracle was able to beat analysts' estimates during this extremely challenging period is quite impressive.
And the company's quarterly conference call anticipated good things on the horizon. Oracle's e-business suite, 11i, has begun to gain traction in the marketplace with over 400 customers running their businesses on this platform. This compares to the initial rollout a year ago with no customers to use as references. Oracle will likely continue to benefit as 11i gains acceptance in the marketplace.
Looking ahead, Oracle will also benefit from the launch of the latest version of its database software, 9iDB. Oracle is the clear leader in the database market and the launch of 9iDB should only help to lengthen the company's lead. Oracle is also looking to make a mark in the lucrative application server market with the launch of Oracle 9iAS. While Oracle will likely run into stiff competition from BEA Systems (BEAS ) and IBM Corp. (IBM ), Oracle should gain some market share, helping to boost revenues over the near term.
In the middle of a strong product upgrade cycle, Oracle's future looks bright. At approximately 36 times S&P's fiscal 2002 earnings per share estimate of $0.52, with improving profitability, a return on equity in excess of 40%, and 15-20% long-term growth, S&P believes that the shares are attractive and would accumulate Oracle at these levels.
Rudy is an equity analyst covering software stocks for Standard & Poor's