Oracle Beats Lowered Estimates and May Have Seen the Worst, CFO Says

Jeff Henley says the company probably will hit estimates for the coming year.
By Joe Bousquin ,

Updated from 5:43 p.m. ET

After squeaking by on its earnings and falling below expectations on revenue for its fiscal fourth quarter,

Oracle

(ORCL) - Get Report

now thinks the worse may be behind it, according to CFO Jeff Henley.

"We think we've hit the bottom in Q4. It feels like things are picking up a little bit," Henley said in an interview with

TheStreet.com

. "If we're right, than I think we would see a gradual improvement in business conditions, and then by the end of the calendar year, things getting back to normal."

For the company's fiscal first quarter, Henley said Oracle should earn 8 cents per share, in line with analyst expectations. He also said analysts' estimates for earnings of 50 cents per share during fiscal 2002 were "reasonable."

"We would say there's maybe a little more upside than downside this time," Henley said. "And hopefully, this will be a little bit conservative."

Earlier Monday, the world's second-largest software maker said today it earned 15 cents per share for its fiscal fourth quarter, ended May 31, on revenue of $3.26 billion.

That earnings number is a penny better than analysts' expectations of 14 cents per share, but is in line with what Wall Street was expecting before many analysts cut their estimates during the quarter. Analysts also were expecting the company to have revenue of $3.36 billion, according to

Multex.com

. The results are flat to down compared with one year ago, when the company earned 15 cents per share on revenue of $3.37 billion. The company's net income was $855 million, compared with $925.9 million a year ago.

Wall Street's downwardly adjusted numbers are a result of worries the company would issue a profit warning, as it did at the end of its third quarter, but that warning never came.

The company reported software license sales of $1.66 billion, and services revenue of $1.61 billion.

During the regular trading session, Oracle shares closed down 16 cents, or 1.1%, at $14.84. But after hours, they rose to $15.78 on

Island

ECN.

As has been the case with almost all companies over the past six months, it's the guidance that matters, and Henley's prognostication Monday afternoon likely was helping the stock.

The CFO said the company was able to make its earnings numbers by employing vigilant cost controls, using its own software, something it's been touting for nearly two years. But critics have opined that the company also has likely employed significant staff-reduction measures to make its numbers. Monday, Henley said that's not the case.

"Our worldwide headcount declined 1% sequentially in the quarter," Henley said. The company had indicated it would make staff cuts of 1% to 2%, far smaller than the 10% and 20% cuts at other large tech companies. "We've been running pretty efficiently and lean, so we haven't felt the need to do the massive headcount reductions."

Currently, analysts expect the company to earn 8 cents per share on revenue of $2.39 billion for its 2002 fiscal first quarter, which started at the beginning of June, and 50 cents, with sales of $12.43 billion for fiscal year 2002, which ends next May, according to

Thomson Financial/First Call

.

Analysts have warned in recent weeks, though, that their estimates on Oracle may be coming down further, pending what the company says about its results and outlook on its conference call. One area of awful results: the 24% decline worldwide, year over year, in the company's software applications business, something Henley described as "not good."

Other items that might fit into that category were a 40% decline in U.S. applications sales, compared with last year, and a negative growth of 5% in the company's database license sales overall.

With those details in mind, some analysts saw little positive in the fact that Oracle made its earnings number, or that it guided to flat growth.

"It's always kind of a mixed bag with an Oracle report, but with two of the key numbers looking weak, I don't think it's a sign that fundamentals are getting better," says Jim Pickrel, an analyst at

JPMorgan H&Q

, who rates Oracle long-term buy. (His firm hasn't done recent underwriting for the company.) He said the stock's after-hours pop was likely due to people wanting to find the positives in Oracle's report.

Others questioned how long the company can continue to cut the fat internally and make its numbers in the face of slimmer revenues.

"Most of their growth next year is going to come from squeezing more costs out of the system, and you can only do that for so long," says Jon Ekoniak, an analyst with

U.S. Bancorp Piper Jaffray

who rates Oracle a neutral. "There's only so much fat you can get out."

Oracle's Henley countered, "there's still more we can do."

Oracle has been pushing into the lucrative market for sophisticated business software applications in recent years. Because of that push, the 40% decline in Oracle's applications business in the U.S. is a major setback, analysts said.

"That's pretty close to a disaster," Ekoniak says.

The company's numbers are critical, not only for itself, but the rest of software. For Oracle, the results represent the fruit of its fiscal fourth quarter, which accounts for up to one-third of the firm's annual sales. For investors in other software stocks, Oracle's showing offers a glimpse of what's to come, because the firm reports its numbers a month earlier than most other software shops.

In that context, Ekoniak says there is a silver lining in Oracle's report.

"Last quarter, Oracle and others were taken by surprise. I think this quarter, people were expecting a softer environment, and the smart companies, like Oracle, adjusted and will be able to deliver strong EPS performance."

On March 1, a day after the end of its fiscal third quarter, Oracle

warned that it would not meet analysts' estimates for the period due to deals falling through at the last minute, a move that shocked Wall Street and put a chill over the rest of software. But software stocks soon shook off Oracle's cold, and in April and May saw healthy gains. Some of those gains have now been placed in jeopardy, though, as Wall Street worried that Oracle might disappoint all over again. Just think of it as software's own version of the vicious cycle.

But Oracle's results also come at a time when the company is facing increased competition from foes

Microsoft

(MSFT) - Get Report

and

IBM

(IBM) - Get Report

. While Oracle still controls more than a third of the database market, those two firms have been making gains on the leader, using their lower prices as an incredibly effective weapon during tight spending times.

In response, Oracle last week

lowered the costs of its own database software, as it unveiled the next version of that core product, called Oracle9i. Oracle executives have quietly been saying that the new software, which allows companies to run a single software program over multiple machines, will help the company regain its footing in the market.

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