Oracle Meets Lowered Earnings Estimates

Database and applications slide, though, as Larry Ellison calls it the toughest quarter in 10 years.
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Updated from 6:40 p.m. EST

Oracle

(ORCL) - Get Report

, the software giant that warned its earnings would be lower than expected just as other software companies were signaling that business was finally starting to get better, announced fiscal second-quarter results roughly in line with analysts' lowered expectations.

The Redwood Shores, Calif.-based company said it earned $549 million, or 10 cents per share, on total revenue of $2.36 billion. Analysts were expecting earnings of 10 cents a share on $2.46 billion in revenue for the quarter that ended Nov. 30, according to Multex.com. They had expected 11 cents in earnings per share before CEO Larry Ellison warned in November that he probably couldn't make that number.

A year ago, the company earned 11 cents per share on $2.66 billion in revenue.

During a conference call with analysts, Jeff Henley, the company's CFO, said the current quarter would see earnings of 10 cents per share, flat over the year-ago quarter. For the company's fiscal fourth quarter, he said, Oracle should expect earnings to grow 2 to 3 cents per share over the 15 cents earned a year earlier. Analysts' current consensus estimates are for Oracle to earn 11 cents in its fiscal third quarter, and 15 cents during its fiscal forth quarter.

The firm said its operating margins were 35%, which is down from last year's operating margins of 36% during the corresponding period. The current and past numbers are still well short of the 50% margins that Ellison last week boasted his firm will hit once the economy recovers, a prediction that was greeted with strong skepticism from many analysts.

Henley didn't exactly say that his boss was being overly optimistic, but he did seem reluctant to totally cover Ellison's back.

"I'm not going to say that Larry's wrong, but I've certainly cautioned people to have more conservative models," Henley said. "All Larry's saying is there is a lot of margin leverage because of the automation that we've undertaken within the company. So, whether it's 40% or 50%, I don't know, but like Larry, I think we'll see some margin expansion once the economy gets better."

The company's total software-license revenue was $819 million, down 27% from last year's $1.12 billion total.

Total database revenue, which represents Oracle's core business, came in at $1.70 billion, down from $1.88 billion during the same period a year ago, representing a decline of 10%. And when it came to overall new database software sales, not including renewals from previous customers or lucrative service contracts connected to them, database software sales declined 21%.

While Oracle has vociferously denied its claims, competitor

IBM

(IBM) - Get Report

has been crowing about stealing database market share from Oracle this year.

But Henley said the company's decline in database revenue was due to the economy, not the competition, and pointed to Oracle's claim in its press release that 25% of its new database customers are using Oracle to replace IBM and

Microsoft

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products.

"The reason that's in there is because of all the PR where Microsoft and IBM are claiming to be taking business from us. Well, it's baloney," Henley said. "From what we can tell, our problems are economic. I don't think we're losing share."

However, Robert Lund, an analyst with Daiwa Securities America, who rates Oracle hold, contends the company is feeling heat from the competition.

" I don't think the quarter was quite as glossy as the picture they tried to paint. Database sales were really disappointing," Lund said. His company does no banking for Oracle. "I think you can attribute part of it to the economy, but at some point, you have to look at what IBM and Microsoft are doing with database sales. At some point, I think you really have to start to believe they're taking share from Oracle."

Total revenue from Oracle's application software business, which it has been pushing as a high-growth opportunity in recent years, was $653.32 million. Last year, total application revenue was $776.37 million for the corresponding period, which means sales dropped 16% year over year in the most recently completed quarter. Looking exclusively at application software license sales, or straight new software sales excluding contract renewals and services revenue, sales actually declined 42%.

The company said the weak results were due, in part, to the Sept. 11 terrorist attacks.

Some investors might be skeptical of that explanation, though, because Oracle typically closes the bulk of its deals at the end of its quarter, not the beginning. But Henley said the effects of the attacks reverberated beyond their immediate impact.

"When you lose a number of selling weeks, it's difficult to make that up, but it also really changed perceptions in many industries. For instance, we've seen huge layoffs in the financial industry as a result of that, and in the transportation industry, so those industries put off decisions," Henley said.

That's plausible for part of the fall-off in sales, Lund says, but not for the whole shebang.

"I actually tried to model some sort of impact from 9/11 in to my numbers, but for the company to suggest that was a major influence on quarterly results is somewhat suspect," Lund says. "I think it's more of a company issue than it is a market or economic issue."

One silver lining was its application server business. The company said sales of its application server, which it now points to as its latest growth engine, grew 52%. Henley said that represented $50 million in application server license sales. "We think that's running at a high growth rate," Henley said.

CEO Ellison said it was the roughest quarter in 10 years.

"It was our toughest quarter in a decade, but we still made over $800 million dollars in operating profit and a 35% operating margin. When the economy improves, we will earn a lot more," Ellison said in a statement.

But Henley echoed Ellison's comments from last week, saying he believes a recovery is on the way by the spring of 2002. "That doesn't mean we'll be at full demand then, but I think by the end of calendar 2002, we'll see fairly reasonable demand." He said the company should have "slightly better profitability" for the full fiscal year, which ends in May 2002.

During regular trading, shares of Oracle fell 43 cents, or 2.9%, to $14.67 before it released its financial results. In after hours, the shares continued to fall to $14.32, according to Instinet, but then rose again after the company's call.