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Analysts Like What They See at Oracle

Two upgrades reflect optimism about the software maker's fourth-quarter earnings.

Updated from June 12

Analysts handicapping

Oracle's

(ORCL) - Get Oracle Corporation Report

fourth quarter were mostly upbeat, with at least two upgrading the shares after the software marker beat its own earnings estimates.

The news continued to be crowded out by the increasingly ugly fight to take over rival software maker

PeopleSoft

(PSFT)

.

Prudential Securities and Banc of America both upgraded the shares to buy after Oracle posted earnings of $885 million, or 16 cents a share, up 31% from a year ago and beating estimates by 2 cents. Total revenue for the May quarter was $2.83 billion, up from $2.77 billion a year ago and above the $2.75 billion consensus.

New software license revenue rose 1% to $1.2 billion; software license updates and product support increased 12% to $1.1 billion, but services declined 11% to $580 million. Operating margin in the quarter was a record 45%, eclipsing the previous record of 44% in the fourth quarter of 2002, the company said.

Prudential raised its price target to $17 based on "increased confidence in its ability to deliver above-market operating results," adding that "the sales force reorganization separating the applications business from the technology business (i.e., database and application server) is beginning to reap benefits."

Oracle was recently up 47 cents, or 3.5%, to $13.80 on the Instinet premarket session.

Banc of America said it thought Oracle's business fundamentals were turning around and that it faces a beneficial upgrade cycle. Two other brokerages were less sanguine: Both Deutsche and UBS initiated coverage on the software company with neutral ratings Friday.

As Oracle CEO Larry Ellison was announcing his company's stronger-than-expected results,

J.D. Edwards

(JDEC)

announced that it was

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suing Oracle for allegedly disrupting its planned merger with PeopleSoft. Oracle dismissed the suit as "having no merit whatsoever."

And Ellison implied that he won't raise his current $16-a-share offer. "Our all-cash offer is a much safer way for

PeopleSoft shareholders to go," he said during a conference with analysts.

Looking to the current quarter, Oracle expects earnings of 7 cents to 8 cents -- Wall Street is expecting 8 cents -- with revenue growing by 4% to 7%. New license revenue is expected to grow by 2% to 12%, the company said.

Oracle's improved performance comes as investors are focused on the company's hostile $5.1 billion bid to buy PeopleSoft, which is itself attempting a friendly takeover of rival software maker J.D. Edwards.

For the quarter, Oracle's revenue from new application licenses was essentially flat year over year at $246 million, but higher than many analysts had expected. Oracle CEO Larry Ellison pointed to the application results as evidence that his company is overtaking PeopleSoft on its home grounds.

"Many of our major competitors showed significant license revenue declines in their most recently reported quarter. For instance, in PeopleSoft's most recent quarter their applications new license revenues decreased 39% to $80 million. We believe that our growth and PeopleSoft's decline resulted in part from an increase in our competitive win rate over PeopleSoft, and the fact that we are beginning to replace PeopleSoft at a number of major accounts," he said in a prepared statement.

For the year, however, new application license revenue was off 14.4%, to $605.2 million, from $706.6 million.

Cameron Steele of RBC Capital Markets noted that Oracle, which historically has had a weak applications business, took share in the fourth quarter from

Siebel Systems

(SEBL)

and J.D. Edwards, as well as from PeopleSoft. But not from

SAP

(SAP) - Get SAP SE Sponsored ADR Report

, a company some analysts think could

benefit from the turmoil in the software industry. (RBC does not have a banking relationship with Oracle.)

Oracle's core data business improved in the last quarter, rising 3% to $933.5 million, from $904.3 million, while dropping 4.4% for the year, to $2.62 billion, from $2.74 billion.

Earlier Thursday, PeopleSoft said its board voted unanimously to recommend that stockholders reject Oracle's takeover bid, and Oracle responded by expressing disappointment in the action. The company has given no sign that it will back off the attempt. Many analysts believe that Oracle's bid of $16 a share is too low, and before Friday's flurry of announcements had expected Ellison to sweeten the deal.

For the year, net income increased 4% to $2.31 billion, or 43 cents a share, a penny better than analysts expected. But total revenue was off 2% to $9.5 billion.