Oracle's ( ORCL)
strong third quarter showed the database giant is making the most of an expensive acquisition binge. But as with Adobe's ( ADBE) solid results, Oracle's numbers left unanswered a bigger question: How strong is tech spending? Solid performances by the two key software vendors, said Goldman Sachs analyst Christopher Sailer, shed little light on the state of information technology spending. Indeed, when asked on a conference call, Oracle CFO Safra Catz punted, saying, "We have great momentum going into the quarter." Sailer said the strong showing by both companies may be more coincidence than bellwether for March quarter spending conditions. He sees Oracle benefiting from a rebound after a disappointing November quarter and anticipation of a seasonally strong May quarter, and Adobe enjoying pent-up demand for its next major product cycle. The most positive development of the quarter was Oracle's unexpectedly strong showing on the applications side of the business. New-license revenue for application software grew by a very robust 57% to $423 million, well above analysts' expectations of about $368 million. Oracle has spent more than $13 billion on a basket of applications vendors, including PeopleSoft, Retek, Siebel and, most recently, Hyperion ( HYSL). Wall Street has been looking for signs that the huge expenditure is paying off. And it now appears to be doing so.
"The applications number is huge," says Daniel Morgan, a fund manager at Synovus Investment Advisors. "It's a very good sign that the deals
Oracle CEO Larry Ellison has been putting together are paying off." Similarly, the company's report that customer retention remains strong should alleviate fears of defections to SAP ( SAP), which has tried to woo Oracle users. Also surprising was the huge growth in Oracle's middleware business, up 82% year over year. Although Oracle did not give an actual sales figure (middleware is grouped together with database license sales), CEO Larry Ellison claimed that his company has now surpassed BEA Systems ( BEAS). The smaller company grew license sales by just 8% to $168.7 million in its recent fourth quarter. Assuming that Ellison's claim is accurate, it most likely will end long-running speculation that Oracle may buy BEA. After all, if Oracle's middleware business is that strong, adding BEA's software to its already complex mix would likely be an unnecessary and expensive complication. Shares of BEA have slipped nearly one-third in the last six months and on Wednesday were unchanged at $11.52. Oracle is well under way on a massive project to integrate all of its applications and middleware software into Project Fusion. The difficulty of that project concerns investors, and those concerns will likely persist for some time.
Although the company's commentary during its conference call did not address the spending environment, the strong results probably calmed some fears for the tech sector. One good sign: "The strong quarter was broad-based, as the value of the top five deals combined did not exceed $100 million in aggregate and the top 20 did not exceed $200 million," says Friedman Billings Ramsey analyst David Hilal, whose firm doesn't have an investment banking relationship with Oracle. Big wins are never a bad thing, of course, but when a company beats expectations with broad-based strength, it speaks well of its future prospects and indicates some strength in the macro environment.