Oracle Shares Rise On Better-Than-Expected Results

By John Letzing

Oracle Corp. (ORCL) shares jumped Wednesday morning after the software giant beat Wall Street's estimates for its fourth fiscal quarter and issued a better-than-expected forecast for the current period.

In early trading Wednesday, Oracle shares were up 8.2% to $21.50 - setting the stock's highest level in nearly 10 months.

Late Tuesday, the maker of enterprise software reported a 7% decline in earnings for the quarter ended May 31. Total revenue fell 5% to $6.9 billion while sales of new software licenses fell 13% to $2.7 billion. Those results still came in ahead of estimates from analysts.

For the current period, Oracle projected earnings to come in between 31 and 33 cents a share. Analysts have been anticipating first-quarter earnings excluding special items of 30 cents a share, according to Thomson Reuters.

"The quarter was very clean with little to pick on, and in our view, provided a good example of the power of the traditional software perpetual license model plus maintenance, when coupled with consistent execution," John DiFucci of J.P. Morgan wrote in a note to clients Wednesday.

Oracle remains popular on Wall Street, with more than two-thirds of the analysts covering the stock maintaining a buy rating.

The company's shares have gained about 20% since the first of the year, compared to a 14% rise for the Nasdaq. The stock remains below the $24 median price target set by analysts.

"We continue to favor Oracle as a relative outperformer during this downturn because of its large base of recurring maintenance revenues; business diversity (product set, end markets, and geographies); and earnings and cash flow stability," David Hilal of Friedman Billings Ramsey wrote in a report.

Some remain cautious, however, given the state of the economy as well as the company's pending acquisition of Sun Microsystems (JAVA).

"We continue to believe that Oracle's standalone margin profile is unsustainable, and the pending acquisition/integration of Sun is going to be more challenging than the current valuation implies," wrote Peter Goldmacher of Cowen & Co., who rates the stock as neutral. "We believe ongoing consolidation, particularly among the top four enterprise IT providers (Oracle, IBM, Cisco, and Hewlett-Packard) is going to fracture previous go-to-market partnerships, disrupt indirect sales channels and lead to pricing wars."

 
   Momentum 
 

Oracle, which does a significant amount of business overseas, cited the impact of weakened foreign currencies compared to the U.S. dollar on its results. If that impact had been removed, Oracle said, earnings would have increased 9%.

"We have a lot of company-specific momentum," Oracle President Safra Catz said during a conference call with analysts. "We've exceeded our own expectations quarter after quarter."

Revenue from product-license updates and support rose 8% to $3.1 billion in the fourth quarter, Oracle said. The business of maintaining software already sold to existing customers has served as something of a cushion for Oracle during the economic downturn.

In some instances, businesses have the option to go to lower-cost, third-party maintenance providers, but most Oracle customers are compelled to pay a certain percentage of the software's license fee on a regular basis for upkeep.

Oracle said that due in part to its recurring revenue from support, it managed its highest quarterly operating margin since the company went public.

"The margin story really has to do with the fact we have an enormous installed base of customers," Catz said, adding that the company hasn't scaled back significantly on spending.

Catz said the company is now pouring "up to $3 billion dollars a year into [research and development] alone," adding: "We are not a cost-cutting story."

However, one foreseeable impact on Oracle's margins should be the company's $5.6 billion acquisition of Sun, which it expects to close during the current quarter.

"The Sun acquisition will change the margin story for a while, but it will improve over time," Catz said. Though some have speculated that Oracle may want to shed Sun's hardware business in the future, Oracle Chief Executive Larry Ellison suggested during the conference call that hardware is a key part of the company's strategy.

The Sun acquisition provides a chance "to get down into the hardware" portion of the technology platform offered to corporate customers, Ellison said.

-John Letzing; 415-439-6400; [e-mail]