Oracle Exceeds Expectations

The software maker reports second-quarter earnings of 12 cents per share and revenue of $2.5 billion.
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Updated from Dec. 15

In a turnaround from the previous quarter,

Oracle

(ORCL) - Get Report

on Monday reported an 8% increase in fiscal second-quarter revenue from a year ago, signaling a long-awaited pickup in software spending may finally have arrived.

At about 10:45 a.m. EST Tuesday, Oracle shares were up 23 cents, or 1.8%, to $12.93.

The Redwood Shores, Calif.-based software maker reported double-digit year-over-year gains in both its applications and database software businesses, while also posting improvements in its operating margins in its fiscal second quarter, which ended Nov. 30.

"Tech spending seems to be improving," CFO Jeff Henley said in a post-close conference call. "We're more optimistic right now."

Oracle CEO Larry Ellison, who talked up the company's foray into grid computing with the latest version of its database, was uncharacteristically a bit more tempered. "There is an upturn, but the upturn isn't dramatic," he said on the call.

Oracle reported net income on a generally accepted accounting principles basis of $617 million, or 12 cents a share, in the second quarter, compared with net income of $535 million, or 10 cents a share, in the same period a year earlier. Wall Street analysts polled by Thomson First Call were expecting earnings of 11 cents a share, and Oracle's target was 10 cents to 11 cents a share.

Revenue rose 8.2% to $2.5 billion from $2.31 billion a year earlier and 20.6% from $2.07 billion in the previous quarter. The consensus estimate called for revenue of $2.41 billion, and Oracle said it expected revenue to grow 2% to 5% from the prior year's quarter to between $2.36 billion and $2.42 billion.

License revenue -- an important measure of new software sales -- rose 11.8% from a year ago to $855 million. That also represented a whopping 62.9% sequential jump, coming in just shy of the highest Wall Street estimate. The average of 10 analysts pegged license revenue at $792.6 million, while Oracle's broad guidance forecast license revenue could range from 3% lower to 7% higher than a year ago.

"It just shows you there's more depth to this organization than people have given them credit for," said JMP Securities analyst Pat Walravens, who raised his rating on Oracle to a strong buy from a market perform on Dec. 1. "A lot of people didn't think they could do it." (JMP hasn't done any banking with Oracle, and Walravens doesn't own any Oracle shares.)

Looking ahead, Henley said third-quarter earnings should range from 11 cents to 12 cents a share, compared with the consensus estimate of 11 cents a share.

Third-quarter revenue should climb 7% to 10% year-over-year, which would bring it to $2.47 billion to $2.54 billion, Henley said. That's higher than the consensus estimate of $2.45 billion. License revenue should increase 5% to 15% year-over-year, Henley said.

"We think Oracle can also gain market share in both database technology and applications," Henley said. "We should do very well."

Oracle, still pushing ahead with a hostile takeover bid for rival

PeopleSoft

(PSFT)

, was under the gun to show stronger results in its second quarter ending in November after disappointing Wall Street with a weak first quarter.

The world's second-largest software maker's results are often viewed a signal of how the broader software sector is faring because its quarter ends a month earlier than most of its peers.

Oracle's core database business, which has been hit by tough competition from heavyweights

Microsoft

(MSFT) - Get Report

and

IBM

(IBM) - Get Report

, posted a long-awaited 10.6% climb in revenue from a year ago, to $712 million. The company is ending support for an older version of its database this month, a move viewed as a potential driver of add-on sales as customers upgrade to a more recent version.

Oracle's applications business, which was initially plagued by bugs, registered 26.9% year-over-year growth in new license sales, to $137 million. Oracle made a point of noting in a press release that growth outperformed competitors

SAP

(SAP) - Get Report

, PeopleSoft,

Lawson Software

(LWSN)

and

Siebel Systems

(SEBL)

in their latest quarters.

Outsourcing is the fastest growth segment of Oracle's applications business, ringing in an 82% increase in sales year-over-year.

But the year-over-year comparisons for applications were easy, noted Tony Ursillo, an analyst with Loomis Sayles & Co., which owns Oracle shares. "Applications didn't do anything special in the quarter," Ursillo said. But the database business "more than made up for that."

"The performance was definitely better than what one might have expected," he added.

Ursillo also pointed out one often-overlooked side effect of Oracle's $19.50-a-share hostile takeover bid on PeopleSoft: a decline in stock repurchases. In an effort to conserve its cash for the purchase, Oracle spent only $399 million to repurchase stock in the six-month period ending Nov. 30, less than one-quarter of the $1.71 billion spent in the same period last year.

Oracle spent $14 million on its PeopleSoft bid in the second quarter.

Oracle's North American sales, which were particularly weak in the first quarter, rebounded, showing a 21.4% jump in new software license sales. The company was expected to receive a boost from sales to the federal government, whose fiscal year ended during Oracle's second quarter.

The company's operating margin soared to 37%, from 30% in the first quarter.