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Oracle fails to impress
Software giant reports better than expected 4Q profit but stock falls on sales growth concerns.
June 15, 2004: 6:37 PM EDT
By Paul R. La Monica, CNN/Money senior writer

NEW YORK (CNN/Money) - Oracle Corp., which remains embroiled in a hostile takeover battle for rival software firm PeopleSoft, reported fiscal fourth-quarter earnings that were slightly better than expected, and improving sales.

Still, the stock fell after-hours as investors had been hoping for even higher sales of new software, particularly in the applications business -- where Oracle competes with PeopleSoft.

The Redwood Shores, Calif.-based company reported net income of $990 million, or 19 cents a share, a 15 percent increase from the $858 million, or 16 cents a share, Oracle earned in the same period a year ago. Analysts were expecting Oracle to report earnings of 18 cents a share.

Revenues came in at $3.076 billion, up 8.5 percent from $2.83 billion a year ago and a hair better than Wall Street's $3.07 billion consensus estimate.

Sales of new software licenses, a widely watched measure of demand, came in at $1.31 billion, up 10.6 percent from $1.18 billion a year ago. Oracle told investors in March that it expected new license sales to increase between 5 percent and 15 percent from last year's fourth quarter. The remainder of Oracle's revenues come from license updates, product support and services.

Shares of Oracle (ORCL: Research, Estimates) tumbled nearly 2.5 percent after hours according to INET after gaining about 1.4 percent on the Nasdaq Tuesday in anticipation of the earnings report.

Good news but could it be better?

The stock is down 11 percent year-to-date and has lagged major software competitors since announcing its troubled bid for PeopleSoft more than a year ago.

PeopleSoft has rejected four different offers from Oracle. In addition, the U.S. Department of Justice is suing to block the merger on antitrust grounds. A trial began in San Francisco last week.

For the full year, sales rose 7 percent to $10.2 billion and earnings per share increased 16 percent to 50 cents a share.

And although Oracle Chief Financial Officer and Chairman Jeff Henley pointed out in a written statement that the company's full fiscal year operating profit of $3.9 billion was "the best operating profit we've ever delivered; even better than our best year during the Internet bubble," that did not seem to be enough to excite Wall Street.

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Some analysts have expressed concerns that the takeover battle is distracting Oracle at a time when the overall economy, and corporate tech spending in particular, is improving. So it doesn't help that Oracle's guidance for the fiscal first quarter, typically its weakest, was also uninspiring.

During a conference call with analysts, Henley said that first quarter sales should be up 6 percent to 9 percent from a year ago, which implies a range of $2.19 billion to $2.26 billion. Henley added that 1Q earnings should be 9 cents a share, in line with consensus estimates. Oracle reported earnings of 8 cents a year ago.

Oracle's flagship database business did report another strong quarter, with new licenses increasing 15 percent from a year ago, to $1.08 billion.

Lack of apps growth worries the Street

But Oracle's applications software business reported a 6 percent drop in new software licenses from a year ago to $231 million. This comes on the heels of flat year-over-year growth from the applications business in the third quarter.

The applications software business has become the subject of much interest among investors during the past year. Oracle is trying to buy PeopleSoft (PSFT: Research, Estimates) in order to bulk up its presence in the applications market, selling software to businesses that helps automate routine tasks such as customer relationship management and payroll functions.

The applications market is seen as being very lucrative, so lucrative that software giant Microsoft (MSFT: Research, Estimates) announced last week that it had held merger discussions with industry leader SAP (SAP: Research, Estimates) last year.

But the fact that Oracle reported another disappointing quarter in applications shows that the company is still playing catch-up in this business.

"The applications business continues to stumble and this quarter shows that," said David Hilal, an analyst with Friedman Billings Ramsey. "Oracle doesn't have the best applications products. That's why they want to buy PeopleSoft."

Oracle, by dragging out this takeover battle, has been trying to weaken PeopleSoft's competitive position. But Hilal said that the PeopleSoft takeover saga is probably having a bit of a negative effect on Oracle's applications sales and might be driving some customers to SAP.

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"I have heard some customers say they have viewed SAP as having an advantage because there's no warts or pimples, no distractions," Hilal said.

Jason Brueschke, an analyst with Pacific Growth Equities, said he expects to see meaningful growth from Oracle's applications business since the economy is picking up. So that makes the fourth-quarter drop all the more disappointing.

"The corporate spending environment was better in the fourth quarter of fiscal 2004 than fiscal 2003 and yet, Oracle's application sales business declined," said Brueschke. "This suggests that clearly it's a company-specific problem."

During the call, Oracle chief financial officer Larry Ellison downplayed concerns about the decline in new license growth, stressing that analysts need to look more at the fact that license renewal and support revenues continue to climb.

Renewal and support revenues for applications software increased 2.6 percent from a year ago while database renewal and support sales were up 16 percent.

Still, Brueschke said that Oracle's latest applications results clearly show why it needs to make some acquisition. But he's skeptical about whether the PeopleSoft merger will ever take place. Even if Oracle wins the antitrust trial, he doubts that the merger would pass regulatory muster in Europe, let alone get approved by PeopleSoft.

Henley, however, said during the conference call that Oracle was continuing to look at other acquisition possibilities, regardless of what happens with PeopleSoft.

Analysts quoted in this story do not own shares of the companies mentioned and their firms have no investment banking ties to the companies.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.