Oracle Meets Views As Sales Fall Short, But Q3 Looks Solid

BY J. BONASIA

INVESTOR'S BUSINESS DAILY

Posted 12/18/2008

Business software giant Oracle (ORCL) met analysts' second-quarter earnings estimates Thursday even as sales fell short amid weak spending, compounded by a strong dollar that hurt overseas results.

But Oracle's better-than-expected third-quarter outlook cheered investors, sending shares up nearly 3% in late trading.

Oracle President Safra Catz says the company feels "extremely good" about its recent results in light of the weakening economy.

"The product and competitive positioning of the company is strong," Catz said.

For the quarter that ended Nov. 30, the leader in database software earned 34 cents per share, 10% over the year before. Sales grew 6% to $5.6 billion, 4% below the average estimate of analysts polled by Thomson Reuters.

Outlook Good Enough

For the current quarter, the Redwood City, Calif., company sees sales growing 8% to 11%, excluding currency effects; analysts had forecast an 8% jump.

Oracle expects earnings of 34 cents to 36 cents, adjusting for currency and excluding special charges; analysts had forecast 34 cents.

With currency effects not taken into account, the company sees sales growth of 1% to 4% and earnings of 31 cents to 33 cents.

But new software sales — a harbinger of future growth — may fall as much as 10%. Even excluding currency effects, Oracle doesn't expect sales to grow more than 11%, well below its historical growth rates.

That deceleration worries many technology investors, says Richard Williams of Cross Research.

New database and middleware license revenue grew just 4% in the second quarter from the year before, well below the double-digit gains it usually posts.

The trend is less dramatic when accounting for currency fluctuations, but at 12% the adjusted growth rate is still the lowest in at least six quarters.

"Bottom line, Oracle is hurting just like everybody else," Williams said. He has a hold rating on the stock.

In September, Oracle expected sales of new software licenses to grow 2% to 12% in the quarter. Instead, they fell 3% to $1.63 billion.

Oracle's large base of recurring revenue, about 50% of total sales, should help the company weather the rough economy, says Brent Williams of Benchmark Co.

Others are less sanguine.

"Oracle does not appear to be immune to uncertainty surrounding (technology) buying," Wachovia analyst Philip Rueppel wrote when he cut his forecast for Oracle's fiscal 2009 revenue and earnings earlier this month. "As a result, we are forecasting a longer and deeper decline in new software license growth."

He still rates the stock as outperform or buy.

Oracle might be gearing up for "significant across-the-board" layoffs, according to Patrick Walravens of JMP Securities.

Oracle has spent some $35 billion on acquisitions in the past five years to build its portfolio of business applications.

The recession should let Oracle make less costly buys, says Avi Cohen of Avian Securities.

Oracle also should gain from the weak economy because customers will be wary of buying from smaller rivals.

"Organizations will have a lower propensity to spend with companies that may be forced to significantly cut back R&D or go bankrupt," Cohen wrote in a research note on Thursday. He rates Oracle stock as positive.

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