|Shares of Oracle have been stuck in a tight range for the past two years. Will the stock break out of it after reporting strong 4Q results?|
NEW YORK (CNN/Money) -
Oracle, one of the world's largest software companies, reported solid fiscal fourth quarter results Wednesday, citing healthy demand for its database software and success merging with PeopleSoft.
The company reported that earnings, not including certain one-time charges, increased by 36 percent from a year ago to 26 cents per share, three cents ahead of Wall Street's expectations.
Pro-forma sales were up 32 percent, to $4.06 billion, ahead of the consensus estimate of $3.89 billion. Revenues grew at a 26 percent rate, to $3.88 billion, after excluding certain items.
Oracle raised its sales and earnings guidance for fiscal 2006, which ends next May. The company said during a conference call with analysts that full year sales should be between $14.2 billion and $14.4 billion and that pro-forma earnings would be between 78 cents and 81 cents a share.
Analysts were expecting revenues of $14.2 billion and earnings of 78 cents, according to Thomson/First Call.
For the company's first quarter, which ends in August, Oracle said it expects earnings of 14 cents, in line with estimates, and sales of $2.92 billion to $2.98 billion. Wall Street had been predicting revenues of $2.94 billion.
"Oracle is executing very well," said Trip Chowdhry, an analyst with FTN Midwest Securities. "This validates that Oracle is a leader in consolidating the software sector. The strategy they are embarking upon is the right strategy."
And Oracle's news could be a good omen for the rest of software -- Oracle's quarters end a month before most of its competitors so its results are typically viewed as a sign of what's to come.
Shares of Oracle (Research), which have languished for the past two years as it fought a hostile takeover battle for PeopleSoft, surged 5.5 percent at the opening bell Wednesday.
SAP (Research), one of Oracle's top rivals, gained nearly 2 percent after the market opened. Shares of Microsoft (Research), the world's largest software company, were up slightly as well. Smaller Oracle competitors such as Siebel Systems (Research) and BEA Systems (Research) also rose in early trading Wednesday.
Oracle reported strong results in its two main businesses. New license sales, a key measure of current software demand, increased 16 percent in Oracle's bread and butter database unit while new sales of applications software grew 52 percent.
The strength in applications software, which helps businesses automate routine corporate tasks like customer relationship management, payrolls and supply chains, is particularly noteworthy, said Brendan Barnicle, an analyst with Pacific Crest Securities.
That's because applications software is a more lucrative area of the market than Oracle's maturing database business, which accounted for nearly 80 percent of new software license revenue in the fourth quarter. A desire to become a bigger player in the applications segment was the reason behind Oracle's purchase of PeopleSoft, which closed earlier this year.
"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," said Safra Catz, a co-president of Oracle, in a written statement.
The strong sales in applications were also a positive since investors were disappointed with the results from that business in Oracle's previous quarter. That led to some worries that the PeopleSoft deal was not progressing well.
"People were pleasantly surprised with the application license number this quarter so this puts to rest a lot of concerns," said Bob Stimson, an analyst with WR Hambrecht.
Easing concerns over expansion plans
Still, Oracle has continued to face criticism from some investors about its acquisition ambitions. In addition to PeopleSoft, Oracle recently outbid SAP to buy Retek, which develops software for retailers. Oracle CEO Larry Ellison has hinted that more deals are to come, which has some worried that Oracle will go on a lavish buying binge that won't pan out.
Ellison sought to allay some of these concerns during the conference call.
"We have no plans to buy anything that doesn't contribute to our long-term strategy and profit growth targets of 20 percent a year for the next five years. We are not going to do anything to jeopardize those goals," he said.
So the fourth-quarter results could help convince some skeptical investors that Oracle's acquisition strategy is working. "The quarter was very strong. If we could see another good quarter of applications revenue then that would demonstrate to people that the PeopleSoft acquisition made sense," said Barnicle.
But there was some doubt about how healthy near-term demand is for Oracle, despite the strong results.
"I'm positive on the quarter but I think there is going to be a debate over the outlook," said Stimson. "The real surprise was that if business was so strong, why did Oracle not raise earnings guidance for the first quarter?"
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Barnicle owns shares of Microsoft but his firm has no banking relationships with it or other companies mentioned. Chowdhry and Stimson do not own shares of any companies mentioned and their firms have no banking ties to any of the companies.