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Oracle Shares Shoot Higher

The company beats expectations as revenue jumps 26%.

Updated from Sept. 20

SAN FRANCISCO -- Shares of

Oracle

(ORCL) - Get Report

climbed Friday after the company reassured investors about the strength of its revenue and profit.

On Thursday, the Redwood Shores, Calif. business software developer reported revenue of $4.53 billion, 26% better than the same quarter of the prior year's top line of $3.6 billion. Analysts were expecting $4.34 billion, according to Thomson Financial.

EPS was 16 cents on net income of $840 million, up 25% over the previous year, when net income was $670 million, or 13 cents a share.

Excluding items, EPS was 22 cents. Analysts had projected EPS, less items, of 21 cents a share.

Oracle shares were recently up 4.5% to $21.99.

The company said it added $1 billion in free cash flow during the quarter, 40% above the same quarter of the prior year. Free cash flow improved because collections increased during the quarter and money paid upfront on multi-year maintenance contracts was deferred, said President and CFO Safra Catz.

New license revenue for application software was up 65%, while services revenue rose 25%.

The company cut its previous stock buyback rate of $1 billion per quarter to half that amount. But it also paid down $1.4 billion in commercial debt, Catz said.

Operating margin improved by 1% year over year, to 37%, Catz said.

Oracle's revenue strength looks to continue in the current quarter. The company predicted that second-quarter revenue would grow from 19% to 21% year on year, to a range of $4.95 billion to $5.04 billion. Excluding items, revenue will range from $4.91 billion to $5.04 billion, an increase of 18% to 21% year on year.

EPS should be 20 or 21 cents, or either 26 or 27 cents excluding items, Catz said.

Analysts had expected EPS of 26 cents on revenue of $4.88 billion.

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Shares of Oracle were up 10 cents in after-hours trading to $21.14.

Oracle CEO Larry Ellison scorned

SAP's

(SAP) - Get Report

strategy of going after small- to medium-sized businesses with its launch of Business ByDesign, formerly nicknamed A1S, a subscription-based, on-demand software suite for the lower end of the business market. SAP projects the suite will add $1 billion annually to its top line beginning in 2010.

"We've looked at going down-market, and we think it's very hard to make money because there's no synergy," with Oracle's large-enterprise business model, Ellison said. "You need an all new sales force ... It's very expensive to call on small business; the cost of sales and implementation is high. And there are no synergies in sales, marketing and product support."

In a back-handed compliment to his former protégé Marc Benioff, CEO of

Salesforce.com

(CRM) - Get Report

, which sells on-demand CRM software to businesses of all sizes, Ellison said: "The best software company in the world by far is Salesforce.com. And they don't make any money."

Salesforce is signing new subscribers

at the rate of 60% year over year and growing revenue at 33%.

"Our strategy is to add value by going upstream," Ellison said. Oracle is looking for market growth through software for industry sectors. "There's a huge amount of headroom for these verticals to grow enormously."

Trouble in the financial services sector hasn't trickled down yet, said Phillips. "It hasn't translated yet to any definite change in spending. There will be

sector layoffs; those are coming," but sales staff had not yet reported seeing any impact, he added.

Catz said the company had been able to improve operating margin while accelerating revenue growth as Oracle's numerous acquisitions, which had initially generated higher expenses, had started to "pay back." And the company has begun recognizing more of its backlogged revenue, she added.

The pipeline for the second quarter is "extremely strong," with a higher rate of deals expected to close, Catz said.