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Oracle Gets Silent Treatment

With the noise from an acquisition spree fading, investors look for signs of real growth.
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(ORCL) - Get Oracle Corporation Report

, a company that Wall Street loves to hate, gets another chance Monday to convince investors that it can once again build shareholder value.

Over the last three years Oracle's stock has underperformed the leading indices and its competitors, appreciating by just 9% since the spring of 2003. The

S&P 500

, meanwhile, has returned a gain of 56%, the


has grown 71%, and Oracle's German software rival


(SAP) - Get SAP SE Report

has surged 155%. Even


(MSFT) - Get Microsoft Corporation Report

, often derided as a chronic underperformer, has returned 22% in the same period.

Nothing that happens when Oracle reports its third-quarter results is going to make a huge difference to the stock in the short run, but for the first time in a while there's some feeling that the company has a chance to gain some traction.

"The noise and customer confusion following all the acquisitions is quieting down," says Edward Moore, an analyst with the National City Private Client Group.

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The purchase that began the company's $13 billion (net cash) acquisition binge, PeopleSoft, closed more than a year ago, and the quarter will include three months of its revenue, along with a month of revenue from the more recently acquired Siebel Systems.

Despite Oracle's huge expenditures to bulk up its applications business, Wall Street will be focusing on the company's foundation: the database business.

"There's been some disappointment in the database business in the last few quarters," says Moore, whose company is long the stock. "It's important that growth accelerates again."

Hitting that target won't be terribly easy. Oracle's database business grew by 12% in the third quarter of last year and 16% the following quarter -- both numbers that pleased Wall Street. Doing better than that in either of the next two quarters would help quell fears that were raised by the company's most recent -- and seasonally weak -- first and second quarters, which produced database growth of 2% and 5%, respectively.

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There's a feeling of optimism about the database business; a spate of sell-side notes published last week were nearly all bullish on databases. Sanford Bernstein analyst Charles Di Bona, for example, is expecting database license sales of $893 million, up 12% from $795 million a year ago. Di Bona, whose company does not have an investment-banking business, says the new version of Oracle's database software is doing well in general and is also pulling sales of high-margin add-on products, such as RAC, or real application clusters.

Analyst Jason Maynard of Credit Suisse is expecting database license sales of $870 million to $880 million, compared with the informal consensus of about $853 million, which would represent growth of 7.3%. Other analysts cited positive channel checks, a not-always-reliable indicator of actual business, as a reason for their optimism.

Confidence in the quarter as a whole was bolstered in early February when Oracle, which had closed the Siebel deal a week earlier, issued revised guidance. The company now expects to post a non-GAAP profit of 18 cents a share on sales ranging from $3.5 billion to $3.55 billion. Wall Street's expectations are in line with that forecast, though it's worth noting that the First Call consensus collected prior to the new guidance called for a 19-cents-a-share profit.

At the time, CEO Larry Ellison said that any upside in the third and fourth quarters would likely come from the database and middleware business, implying that there probably won't be upside to the applications business.

Analysts expect the applications-license business, which has lagged for some time, to come in at about $234 million, compared with $152 million a year ago -- an increase of 54%. However, the year-ago quarter included just two months of PeopleSoft revenue and no Siebel revenue, so the comparison is flawed.

Indeed, much, perhaps all, of the company's recent growth in the applications business has been through revenue acquired via acquisitions. Acquired revenue, particularly maintenance fees, is very high-margin, and that has helped Oracle meet its aggressive bottom-line growth projections.

But many investors want to see organic growth on the top line, and, so far, that has not happened as a result of the acquisition binge.

Consider the first fiscal quarter of this year, in which Oracle's application revenue was $127 million, including revenue from PeopleSoft, J.D. Edwards and Retek.

But had the applications revenue of all those companies been combined a year earlier, the total would have been $215 million, according to an analysis by former Prudential Securities analyst Brent Thill, who is now with Citigroup. In effect, Thill said at the time, Oracle's organic applications business has shrunk sharply.

Oracle no longer breaks out revenue attributable to acquired companies, saying that since sales forces have been combined there's no accurate way to do so.

Has all of the bad news and bad press beaten the stock down too far? It may well have, says Ashi Parikh, a portfolio manager with Eagle Asset Management. Parikh notes that the stock is trading at just 17 times earnings, which is roughly equivalent to that of the S&P 500.

Moreover, the difficult comps in the next few quarters are already priced into the stock. If he's right, the database numbers won't have to be stellar to satisfy investors, just better than last year.

Similarly, Bear & Stearns analyst John DiFucci rates Oracle an outperform and says the "database business is executing particularly well." His forecast, though, is for database license growth of just 3%. Bear Stearns does not have a current investment-banking relationship with Oracle.