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Oracle Buys; Investors Sell

The stock falls to a three-month low as acquisitions can't offset sluggish organic growth.
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ambitious acquisition binge may pay dividends in the future, but the company's first quarter, which featured slowing growth in its core database business and a small miss on the top line, disappointed Wall Street.

The stock started slipping as soon as traders digested an unusually complicated earnings report late Thursday, and in early trading Friday, shares were off $1.12 recently, or 8.28%, to $12.40 -- a three-month low.

The software giant met first-quarter EPS expectations, reporting a profit of $519 million, or 10 cents a share, compared with $509 million, or 10 cents a share a year ago. Excluding items, the company earned $738 million, or 14 cents a share.

Revenue totaled $2.77 billion, an increase of 25%.

But non-GAAP revenue of $2.91 billion was just shy of analysts' estimates at $2.94 billion. (The difference between the two figures: an "add back" of $140 million in maintenance revenue that was written down as a result of the PeopleSoft acquisition.)

Database and middleware license sales grew about 1% to $502 million, well under Wall Street's informal estimates and the slowest growth rate in nearly two years.

CEO Larry Ellison defended the number, saying that database license sales grew by an unusually strong 20% a year ago. "When the two quarters are averaged, growth is right on our target of 10%," he said during a conference call late Thursday with investors.

Bolstered by the acquisitions of PeopleSoft and Retek, sales of licenses for business applications, traditionally a weak point for Oracle, grew by 84% to $127 million, which the company called "exceptionally strong performance."

Co-President Charles Phillips said during the call that not all of the growth was a result of revenue from the acquired companies. Sales of Oracle's "e-business" suite grew by 21%, while sales of Oracle's human resources products were up 57%.

But Wall Street wasn't buying the applications story. Prudential analyst Brent Thill said he was puzzled by Oracle's upbeat assessment, and noted that the $127 million figure was just $20 million higher than Oracle's organic performance two years ago. In the first quarter of fiscal 2004, applications revenue was $107 million.

Thill wasn't alone. The informal consensus for application license revenue was $153 million.

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Greg Maffei, Oracle's co-president and chief financial officer, said the company had signed two large deals during the first quarter but was unable to complete the work before the end of the period. And Ellison said middleware business was strong, with 34% growth in revenue. But because database and middleware sales are lumped together, the big increase in middleware could indicate that database sales were actually off a bit.

Looking to the second quarter, Oracle told investors to expect a profit of 19 cents a share, on revenue ranging from $3.37 billion to $3.46 billion. Analysts polled by Thomson First Call were looking for a forecast of 19 cents a share and revenue of $3.47 billion.

Oracle has been in the throes of a massive expansion by acquiring, or announcing its intention to acquire, nine companies in less than a year, and making a heavy investment in a 10th. Including the purchase of PeopleSoft, the shopping spree could total more than $14 billion, net of the acquired cash.

Ultimately, the acquisitions are designed to strengthen Oracle's hand against rivals






. Oracle can well afford the shopping spree, but there are concerns that the company's

organic rate of growth is too slow, and that, say some analysts, will hold down share value.

The first quarter appears to confirm those fears -- at least in the short run. Oracle no longer breaks out the contributions made by acquired companies, and that, says Richard Williams, chief software analyst for Garban Institutional Equities, is a source of serious confusion.

"Taking the past four quarters on a rolling basis, and then adding the contribution of Retek and PeopleSoft to the year-ago period, Oracle growth was essentially flat," he said in an interview.