Updated from 8:19 a.m. EST

Oracle ( ORCL) ended lower Friday as traders discounted research arguing the shares were a bargain after two consecutive quarters of solid earnings.

Oracle ended at $12.05, down 20 cents, or 1.5%. The Redwood Shores, Calif.-based software giant reported net income of $635 million, or 12 cents a share, in the fiscal third quarter, which ended Feb. 29. That compared to net income of $571 million, or 11 cents a share, in the same period a year earlier.

The stock's decline occurred despite research notes from several analysts pointing out that the shares trade at a discount to peers, in part because of uncertainty surrounding its hostile buyout offer for PeopleSoft ( PSFT). J.P. Morgan called the company one of the most attractive plays in the software sector, while S.G. Cowen said recent weakness creates a trading opportunity.

First Albany upgraded the shares to buy, saying the quarter included the best database license growth in three years. It also cited the shares' recent weakness as creating a good entry point beneath its $15 price target.

Third-quarter revenue rose to $2.51 billion from $2.31 billion a year earlier and was virtually flat from the previous quarter. License revenue -- a measure of new software sales -- climbed to $840 million from $743 million a year ago and up just very slightly from $849 million in the second quarter.

The results were exactly in line with Wall Street analysts pegging net income at 12 cents a share on $2.51 billion in revenue in the third quarter, according to Thomson First Call. The average third-quarter license estimate of 11 analysts was nearly $839 million.

But Oppenheimer analyst Sanjiv Hingorani noted that the results benefited from currency exchange rates. The company's guidance called for exchange rates contributing to a 6% increase in year-over-year sales, but a weaker dollar actually was responsible for 7% of the year-over-year growth in total revenue and 8% of new software license growth, he noted.

"The underlying growth rate is obviously less by that amount," Hingorani said. "It was an in-line quarter but not as robust as might appear on the surface." Hingorani has a neutral rating on Oracle and his firm hasn't done banking with the company.

In a post-close conference call, recently appointed Oracle chairman and outgoing CFO Jeff Henley said the company expects to post 10% revenue growth in its seasonally strong fourth quarter, bringing sales to $3.11 billion. New license sales should grow 5% to 15% year over year, to between $1.24 billion and $1.36 billion.

Earnings are expected to range from 17 to 18 cents a share, up from 16 cents a share a year ago.

Analyst were forecasting Oracle's earnings in the fourth quarter would jump two pennies from a year ago to 18 cents a share, with total revenue up 8% year-over-year to $3.06 billion.

"We should have a good year in calendar 2004," Henley said. "We continue to believe we will see only modest improvement -- but at least improvement -- in software spending" in calendar 2004.

The third quarter was the second in the row that the world's second largest software maker posted relatively solid results -- an important milestone after a rollercoaster ride of bad quarter after good quarter.

The results come as Oracle moves its quest for rival PeopleSoft ( PSFT) to the courtroom as it fights the Department of Justice's effort to block the acquisition on anti-trust grounds. A trial date has been set for June 7. Oracle spent $15 million in the quarter on its PeopleSoft fight.

"This was a very strong quarter for our database business," Oracle CEO Larry Ellison said in a press release. New license sales in the company's core database business grew 16% from a year ago, while business from the RAC -- real application clusters -- option for databases showed 86% growth. The RAC option is required for Oracle's latest database release, called 10g, for grid computing.

Applications Still a Tough Market

Oracle has been fending off Microsoft ( MSFT) at the low end and IBM ( IBM) at the high end of the database market. But Microsoft announced this week that it is delaying the release of its next version of its database product to the first half of 2005 from late 2004.

Oracle's applications business -- which competes head-on with PeopleSoft -- remained flat from a year ago, with new software licenses at $140 million. That was light by some analyst estimates, which ranged from $130 million to $176 million. Software license updates and support in the apps business climbed 9% year over year.

Despite those flat results, Oracle management noted that its applications performance is better than its competition. Without its J.D. Edwards acquisition last year, for instance, PeopleSoft's license sales would have declined 20% in 2003 from 2002.

"It's still a tough market. People have been very reluctant to take on a lot of new projects," Henley said. "I think that's definitely affected the applications market."

Oracle's third-quarter operating margin rose to 37% from 35% last year.

Ellison said one thing driving the higher margin has been a "fundamental reshaping of the business" over the past several quarters, with software license updates surpassing new licenses as the largest piece of Oracle's business. He characterized updates as the "subscription" portion of the Oracle's business, in which customers pay an annual fee for updates and support.

Every $1 million in new license sales generates about $220,000 in annual subscription revenue a year, making updates the most profitable piece of Oracle's business, Ellison said. Software license updates and product support reached $1.18 billion in the third quarter, compared to $1 billion a year ago and $1.11 billion in the second quarter.

Ellison has had a bee in his bonnet for some time over Wall Street focusing more on new license sales and ignoring the subscription business. But Susquehanna Financial analyst Ken Carey noted that new license fees are where there's potential for upside surprise, which would in turn drive the stock up. (His firm doesn't have an investment banking arm.)

"Right now the license revenue number is growing OK. We're not getting any growth above what current expectations are," said Carey, who has a neutral rating on Oracle.

Oracle closed Thursday's regular session down 16 cents, or 1.3%, at $12.25; after hours, the stock initially edged up but was recently down 7 cents, or 1.3%, to $12.18.

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