Updated from 10:01 a.m. EDT

Oracle

(ORCL) - Get Report

reported a 28% risein first-quarter earnings but said sales of newsoftware licenses slipped in the quarter,disappointing investors who sought signs new businessis growing at the software giant.

Oracle earned $440 million, or 8 cents a share,on revenue of $2.07 billion in the quarter ended Aug.31, 2003, compared with earnings of $343 million, or 6cents a share, on revenue of $2.03 billion last year.

Analysts surveyed by Thomson First Call forecast earnings of 8 cents, the high end of thecompany's targeted range of 7 cents to 8 cents ashare. The consensus estimate for revenue was $2.14billion, representing 5.4% revenue growth year overyear. That was roughly in the midpoint of thecompany's guided range of 4% to 7%.

New software license sales were down 7% to $525million while software license updates and productsupport sales rose 14% to $1.03 billion. First-quarteroperating margin was 30% vs. 29% last year and arecord 45% in the fourth quarter. License revenue madeup 25% of overall revenue in the latest quarter, downfrom 28% from a year ago.

In a release, Oracle said it expects to see"continued improvement in total revenue and newlicense growth in the second quarter led by NorthAmerica."

In a conference call before market open, CFO JeffHenley said Oracle expects second-quarter earnings of10 cents to 11 cents a share, with total revenuegrowing 2% to 5% year over year. He said licenserevenue is expected to come in anywhere between 3%lower to 7% higher than a year ago.

Wall Street was forecasting second-quarterearnings quarter would come in at 11 cents a share on$2.42 billion in revenue. That translates to a 4.8%climb in revenue year over year and a 13% sequentialincrease.

Analyst estimates for license revenue ranged roughly between $810 million and $820 million for the second quarter, representing between 8% and 9% growthfrom a year ago.

"A slow start in Q1 is not going to keep us fromhaving good year," Henley said. Henley said theeconomy is improving and nothing indicates demand isslowing.

Oracle executives attributed the slow start tosplitting the sales force between applications anddatabase, a change that was most broad-based in NorthAmerica. The Americas were the only geography whererevenue declined year over year. "There were a lot ofbodies moving around," CEO Larry Ellison said on theconference call.

RBC Capital Markets analyst Cameron Steele saidthe results, which are often taken as an indicator forother software companies that report a month later,were a bit of a reality check. "We always kind ofexpect the company to have a struggle a little bit inthe first quarter," he said. But "I'd say this was alittle weaker than we had anticipated."

Steele, who has an outperform rating on Oracle,said he believes the factors behind the results werenot company-specific but related more to economicforces. "I think business is getting better. I thinkdemand is improving a little bit," Steele said. Butthe recovery is not going to be linear, he added.

"It's going to take fits and starts. That's whatinvestors are going to have to deal with," he said. Hesaid software investors should expect mixed resultsand cautious guidance as more companies beginreporting earnings next month. "We continue to advisecustomers to be valuation-sensitive," he said.

Steele owns some shares of Oracle acquired fromprevious employment with the firm, but RBC has notdone any investment banking with the software vendor.

But Mark Lebovitz, an equity analyst for theMunder NetNet and Munder Future Technology funds, saidit's difficult to tell whether the results are drivenby company-specific issues or weakness in the softwareindustry and the economy. "I'll make my conclusion asI see more companies report," Lebovitz said.

Another factor that could be hurting Oracle is theupcoming release of a new version of its databaseproduct, called 10g, for grid computing, Lebovitzadded. "It's possible customers had been waiting forit to be released and were delaying some purchasesuntil it is released," he said.

But, "overall I don't think it

the quarter was asbad as some people are making it out to be," Lebovitzadded. His firm holds Oracle shares.

Oracle's first-quarter results come the same weekas the company's annual OracleWorld conference, wherethe 10g product was the major emphasis. The newrelease, whose official sale date will be announcedsoon, is expected to drive some revenue in comingquarters. However, several analysts have said it isjust an extension of Oracle's clustering concept, inwhich the company distributes functions across severalcomputers to better manage loads.

Oracle's latest quarter included a $14.6 millionpretax expense to cover the cost of its $7.3 billionoffer to buy out rival applications rival

PeopleSoft

(PSFT)

for $19.50 a share.Henley said Oracle has spent $21 million altogether onthe hostile takeover bid. Earlier this monthPeopleSoft raised its revenue guidance for the rest ofthe year and raised both earnings and revenueestimates for next year.

Oracle's database business, which has sufferedfrom stiffer competition from

IBM

(IBM) - Get Report

and

Microsoft

(MSFT) - Get Report

, posted a 7% year-over-year decline innew license revenue, although overall databaserevenue, including upgrades, climbed 5%.

New software licenses, as well as total revenuefrom Oracle's applications business, declined 4%year over year. In the past, Oracle's applicationsbusiness has stumbled because early versions of thesoftware were plagued by bugs.

One sign that led some to believe business hasbeen returning to normal at Oracle was thereinstitution of a salary for CEO Larry Ellison, whohad worked without one for three years. This week afiling with the Securities and Exchange Commissiondisclosed he began receiving a $900,000 salarybeginning Sept. 1.

Oracle shares were down 70 cents, or 5.4%, to$12.28 in recent trading.