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

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, 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, 3/12/07,

>"What the Market Is Telling Us").

"We feel very good about our prospects heading into our seasonally strongest quarter," said Catz. But she noted that Oracle faces a tough comparison with strong fourth-quarter results last year. For instance, it would need to close about $1 billion in new license sales in North America alone next quarter to match last year's results, she said.

Outpacing the Competition

The upbeat outlook contrasts with gloomier results at other business software companies. Security software maker Symantec (SYMC) on Jan. 16 cut its earnings and revenue outlook for the fourth quarter, which ends Mar. 30. And SAP (SAP) on Jan. 24 reported that new license sales fell short of expectations and warned that costs would rise—to Ellison's apparent delight.

Ellison took the occasion of Oracle's earnings call to point out that while SAP's license sales had grown by only about 10% over the past year, Oracle's are up 61%. "We're gaining on them consistently and rapidly," he said.

Heather Bellini, a managing director at UBS (UBS), wrote in a Mar. 20 note that while Oracle's third-quarter license revenue growth "implies significant share gains vs. SAP," investors need to see the contribution from Hyperion and other recent acquisitions "to determine the magnitude" of the gains. And Hyperion won't show up on Oracle's books in a meaningful way until its next fiscal year starts in June.

Meanwhile, Ellison hinted at more acquisitions. Oracle has had success buying software firms that excel in specific industries, like banking and retailing. Now, the company will look at buying other category leaders—possibly in transportation and utilities, according to analysts. "We learned from Jack Welch," Ellison said of the former General Electric (GE) chief executive. "It's much easier to make money when you're No. 1 than when you're No. 2 or 3."

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