Updated from 4:50 p.m. EDT

Oracle

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on Tuesday reported fiscal first-quarter earnings that were in line with both company guidance and Wall Street estimates. Software license revenue fell at the lower end of the company's forecasts.

The Redwood Shores, Calif.-based company's CFO said his outlook for full-year earnings had fallen and that he was less optimistic about the company's chances of posting overall year-over-year annual revenue growth.

Oracle said it earned $342.7 million, or 6 cents a share calculated according to generally accepted accounting principles on total revenue of $2.03 billion in the fiscal first quarter, which ended in August. Excluding an impairment charge related to Oracle's investment in Liberate Technologies, Oracle earned $386 million, or 7 cents a share.

A year ago, Oracle earned $510.6 million, or 9 cents a share, on $2.27 billion in revenue. Sequentially, revenue declined 25.6% from the fourth quarter, which is historically Oracle's strongest, and earnings excluding the impairment charge declined by 2 cents.

During a conference call with analysts, CFO Jeff Henley said the current quarter would see earnings of 8 cents to 9 cents a share, compared to 10 cents a year ago. He said he expects total revenue to fall 4% to 7% from a year ago, which would bring it to between $2.19 billion and $2.27 billion. New license revenue is expected to decline 10% to 15% compared to the year-ago period, which suffered because of the Sept. 11 terrorist attacks and at the time was called the company's "toughest" quarter in a decade by CEO Larry Ellison.

Analysts' current consensus estimates are for Oracle to earn 9 cents a share in the fiscal second quarter on $2.31 billion in total revenue.

Henley repeated his forecast from last quarter's earnings call that revenue will begin to bounce back in the second half of Oracle's fiscal year, which corresponds to the first half of 2003. Henley said he still hopes to return to positive year-over-year license growth in the second half of fiscal year 2003 and flat to positive earnings growth. Henley called the tech environment the worst seen since 1974 to 1975.

"I'm a little less optimistic for the full year based on what played out in Q1 and our view of Q2," Henley said. "I'm less optimistic we will see total revenue growth for the full year." Henley added that his view of earnings has dropped several cents a share for the full year, although he has declined to give full-year estimates for revenue or earnings.

The company's first-quarter operating margin declined to 29% from 33% in the year-ago quarter. Henley said margins deteriorated primarily in Europe because it takes longer to reduce head count there, but he expects the margins to come back as the company further reduces its staff there.

While total head count declined by 510 employees -- or 1.2% -- since the fourth quarter and by 803 employees -- or 1.9% -- from a year ago, Oracle spent 13% more on research and development year-over-year and 4% more on general and administrative expenses year-over-year.

"One encouraging thing was it looks like they didn't cut R&D," said Robert Lund, an analyst with Daiwa Securities, who has a hold rating on Oracle. "It's really important for a company in Oracle's situation to remain very innovative. You don't want to see the R&D number come down until it's the very last place the company would cut expenses." Daiwa Securities hasn't done banking with Oracle.

Henley said the company plans to cut an additional 500 to 600 employees in the second quarter and is planning to hold tight on R&D spending at current levels.

License revenue fell to $563 million, down 23% from $731.4 million in the year-ago period and down 51.9% sequentially from $1.17 billion in the historically strong fourth quarter. Oracle's guidance called for license revenue to drop 15% to 25% year over year.

Database revenue, which represents Oracle's core business, came in at $1.46 billion, down 10% from $1.63 billion during the same period a year ago. Overall new database software sales, not including renewals from previous customers or lucrative service contracts connected to them, declined 9%.

"If you looked at it

the earnings report based on their guidance, it looked like a pretty solid quarter," Lund said. But "the database business continues to erode, despite what the company says."

Indeed, contrasting to the reported lower database numbers, Oracle CEO Larry Ellison cited a new AMR study released in August showing its database share has increased 12% to 54% in 2001 from 50% in 2000, while

IBM's

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declined 27% to 11% from 15%.

However, Henley acknowledged that the first quarter marked the first time sales in Oracle's lower-priced standard edition database suffered declines, which he attributed to weakness in the overseas market.

The company's fledgling application server business, which has been cited as a source of future growth, also did not grow this quarter, Henley said.

Total sales from Oracle's applications software business, which some analysts have said is finally gaining strength after a launch plagued by bugs, were $564.8 million. Last year, application revenue was $639.4 million for the corresponding period, which means sales dropped 12% year over year in the most recently completed quarter. Looking exclusively at new application software deals, sales actually declined 8%.

Application sales in the Asia Pacific region showed particular strength, growing 88% year-over-year. But that was off of a small base of sales last year of only $11.1 million.

"The applications business -- that's really the wild card at Oracle," said Mike Trigg, an analyst at Morningstar. If that doesn't begin to show signs of improvement, Oracle's valuation may suffer, he said. "There's qualitative evidence out there" of improvements, Trigg continued. But "it hasn't been proven yet." Trigg is not recommending buying Oracle stock and said its price would have to fall to $7 or $8 for him to become interested. His firm doesn't do investment banking business.

Oracle instituted a flat-rate commission structure in the U.S. in fiscal year 2002, which pushed some business from the fourth quarter into the first fiscal quarter of 2003. The first quarter was Oracle's sixth quarter of declining year-over-year revenue.

Shares of Oracle declined 25 cents, or 2.7%, to close Tuesday at $9.03. After the company announced results, shares declined further to $8.41 in after-hours trading.