June 29, 2005 9:05 AM PDT

Oracle posts higher profit on license sales

Oracle reported fiscal fourth-quarter earnings on Wednesday that exceeded Wall Street estimates due to strong demand for the company's database software and enterprise applications.

The Redwood Shores, Calif.-based company reported quarterly net income of $1.02 billion, or 20 cents a share, representing a 3 percent increase over net income of $990 million, or 19 cents per share, for the same period last year.

Oracle's revenue for the quarter, which ended on May 31, rose to $3.88 billion, an increase of roughly 26 percent over its result of $3.08 billion for its same period last year.

Excluding items, Oracle reported earnings of $1.36 billion, or 26 cents per share. A consensus of analysts expected earnings of 23 cents per share on that basis, according to Thomson First Call.

Oracle said its integration of PeopleSoft, which it purchased earlier this year, is going smoothly.

"The rapid integration of PeopleSoft into our business contributed to the strong growth in both applications sales and profits that we saw in the quarter," Safra Catz, Oracle's co-president, said in a statement.

The company indicated that its quarterly performance was bolstered by increased sales of new software licenses in both its database and enterprise applications businesses.

Oracle reported that total software revenue was up 24 percent to $3.12 billion year over year. Oracle's database and middleware license sales increased by 16 percent over fiscal fourth-quarter 2004 to $1.26 billion, and its applications license revenue jumped by 52 percent over the same period last year to $350 million.

Oracle said that its services revenue rose by 35 percent compared with the same period last year, reaching $755 million for the quarter.

Ellison upbeat
On a conference call with investors, Oracle Chief Executive Larry Ellison said the earnings reflect continued strength in his company's core businesses. In particular, Ellison said that Oracle continues to win deals over IBM in the database arena and over rivals including BEA Systems in the middleware space.

However, the CEO focused the majority of his comments on the applications arena, where Oracle has been fighting a heated battle with rival SAP. As Oracle has been working to digest its recently completed acquisition of PeopleSoft, SAP has attempted to color the transition as a potential weakness that will encourage customers to embrace its own enterprise software. The rival company has also launched several so-called safe-passage programs that offer license discounts to Oracle customers willing to shift to SAP.

Ellison said that despite those efforts, Oracle has been expanding its applications business rapidly, in North America in particular, where he said the company recorded a 75 percent boost in new license sales, compared with its fiscal third quarter. In addition, Ellison said that Oracle was forced to keep $275 million in new software sales off its records in the quarter as the company had yet to finish the PeopleSoft acquisition and could not yet claim the sales in its earnings report.

"If you count (those sales), this is our second extremely strong quarter, and we think that we're gaining market share in the applications business, especially in certain geographies and industries," he said. "SAP is a very strong competitor in this (business), but there are some areas such as North America where we are much stronger. You really have to look at the applications business country-by-country, industry-by-industry."

Ellison also addressed reports that SAP and other rivals have been able to lure leading talent away from his company and highlighted Oracle's recent hiring of several individuals. Those people included Greg Maffei, a former Microsoft executive serving as Oracle's new co-president and chief financial officer, Tod Nielsen, a former BEA Systems and Microsoft executive who will help oversee Oracle's middleware efforts, and Eileen McPartland, a former Siebel Systems and Accenture executive who will head the company's North America consulting unit.

SAP recently announced it hired former Oracle executives Mike Mayer and Dan Rosenberg, who had been serving as senior director for international projects and vice president of research and development, respectively.

But Ellison denied published reports that the departures struck a blow to the software maker.

On the call, Oracle President Charles Phillips announced a list of new customers that the company has won away from rival SAP, including Alcoa, Best Buy, Cisco Systems, CitiCorp, Hitachi, Starbucks and Toyota.

No struggles?
At least one industry watcher said the applications sales results indicate that Oracle is not struggling to win or retain customers in the business software market, as many people had predicted it might as a result of the company's work to integrate PeopleSoft. Jim Shepherd, analyst with AMR Research, said notions that Oracle would struggle with the PeopleSoft acquisition appear to have been proven false.

"There was so much hysteria about that whole process that people overestimated how much effort it would take on Oracle's part to integrate the two businesses," he said. "What we've said all along is that there will be very few PeopleSoft customers who will move anytime soon; Oracle has done a better job supporting those products than I think most customers expected they would, and I don't think anyone is going to get rich trying to steal customers from Oracle."

Shepherd said that while the strong database sales were expected, the applications sales results beat his own quarterly estimates by roughly 15 percent to 20 percent.

As part of Wednesday's announcement, Oracle released earnings estimates for fiscal 2006, for which the company expects to deliver earnings of 78 cents per share to 81 cents per share on revenue of $14.2 billion to $14.4 billion. Analysts surveyed by Thomson First Call have projected profits of 78 cents per share for Oracle in 2006.

For the fiscal first quarter of 2006, Oracle said it is expecting to report earnings of 14 cents a share on revenue of $2.92 billion to $2.98 billion, which matches analysts' estimates for the period.

 

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