Oracle profits, sales beat the Street

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NEW YORK (CNNMoney.com) -- Software giant Oracle reported fiscal third quarter profits and sales that beat Wall Street's expectations, and also announced that it would be issuing a dividend to its shareholders. The company also reported "record operating margins."

The Redwood Shores, Calif. company posted net income of $1.3 billion, down 1% from the same quarter last year, according to a release posted Wednesday after the closing bell. Meanwhile, Oracle reported earnings per share of 26 cents, up 3% from the same quarter a year ago.

Excluding one time charges, Oracle (ORCL, Fortune 500) posted earnings of 35 cents per share, up 16% from the same quarter last year, which beat analysts' expectations of 32 cents per share, according to a consensus estimate compiled by Thomson Reuters.

Sales for the three months ended in February were $5.5 billion, up 2% from the same quarter a year ago. The revenue beat analyst expectations of $5.4 billion.

One analyst said that Oracle had a very strong quarter. "Definitely, they executed quite well in very challenging macro conditions," said Trip Chowdhry, senior analyst at Global Equities Research.

Chowdhry said that Oracle is "winning market share" because of their aggressive campaign scooping up other smaller companies.

Even though the software giant has been faring the recession well, "Oracle is not insulated because of the massive economic slowdown," said Chowdhry. "However, on a relative basis, they are positioned better than their peers."

Oracle also announced that it would be distributing a cash dividend of 5 cents per share, or 20 cents per share annually, on its common stock.

"We are committed to delivering value to our stockholders through technology innovation, strategic acquisitions, stock repurchases and now through a dividend," said Safra Catz, Oracle's president, in a written statement.

Catz said during the conference call after the earnings release that the dividend was a feat, given the economy. "When many others are reducing or eliminating dividend, we are putting one in place."

The company cited its cash standings and efficient operations model. "We generated $8 billion in free cash flow over the last twelve months and we are running our business at record operating margins," Catz said in the written statement. Operating margins were 36% in the third quarter, up from 35% in the same quarter a year ago.

During the conference call Catz attributed Oracle's record operating margins - a measure of efficiency - to the base of customers,"who have already bought our product and are interested in buying the upgrade each year."

Oracle makes approximately half of its revenue internationally, and the company said the much stronger U.S. dollar hit the company's performance significantly.

Catz said "the only negative story for the quarter was currency," and she expects foreign exchange woes to continue to drag on the software giant's performance.

The company said that its earnings per share were hit 5 cents based on the stronger dollar. According to the release, if currency rates had been even with the same time last year, Oracle would have posted earnings per share of 31 cents. On an adjusted basis, the company would have posted earnings per share of 40 cents, an increase of 29%.

"But for the strengthening of the US dollar leading to unfavorable currency exchange rates, our non-GAAP earnings per share would have increased 29% in Q3," said Oracle CEO, Larry Ellison, in a written statement. "This is a tremendous achievement in the face of the serious slowdown in the world economy."

And if foreign exchange rates were even, Oracle said the company would have seen an 11% surge in revenues for the quarter, much more than the meager 2% it was able to come up with fighting the stronger dollar.

The recession has companies postponing their technology spending, putting off new software application purchases.

Software revenues were up 5% to $4.4 billion, but new software license revenues were down 6% to $1.5 billion. However, as companies work to keep the software they already have functioning well, Oracle said that software license updates and product support revenues were up 11% to $2.9 billion.

Oracle blames even its sagging new software license numbers on the stronger dollar. "If you look past the effect of exchange rates, our new software license revenues for this quarter were higher than our new software license revenues for Q3 of last year," said Oracle President Charles Phillips in a written statement.

Investors liked the report, sending the stock jumping 6% in after hour trading. Shares of Oracle closed up 2.8% in the regular trading session at $15.83.

Providing fourth quarter guidance during the conference call, Catz said new software license revenues should fall between 5% to 15% lower given constant currency and down 17% to 27% under current currency values.

Meanwhile, earnings per share should be between 41 to 45 cents on a constant currency basis and between 34 to 38 cents under current foreign exchange rates. Excluding one time expenses, Catz projected EPS to be between 49 and 53 cents in constant currency and from 42 to 46 cents assuming current exchange rates.

Sales should fall in a range between up 2% and down 3% in constant currency or should fall between 10% to 14% at current dollar levels.

"The guidance is a bit low," said Chowdhry, due to "strength in US currency as well as continued weakness in the global economy."

Oracle has fared the recession better than other technology companies because of its strong middleware business. Even in an economic downturn, businesses need to maintain their database infrastructure.

Oracle faces tough competition in the software arena from rivals Microsoft (MSFT, Fortune 500), IBM (IBM, Fortune 500), and SAP (SAP).