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Oracle Wows 'Em With Margins, Yet Applications Software Sales Don't Dazzle

Firm tops estimates, but sales of new business-to-business software suite aren't as strong as expected.

The "new"


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is plugging away at cutting costs while expanding its profit margins, even without recently departed president Ray Lane. But sales of its new business-to-business software suite haven't been as strong as expected.

Those were a few factors gleaned from Oracle's fiscal first-quarter results, which were released Thursday. The company earned $501 million, or 17 cents a share, in the quarter ended Aug. 31, up from $237 million, or 8 cents a share, in the comparable period last year. Analysts had expected it to earn 13 cents a share, according to

First Call/Thomson Financial

. And the results were even more impressive because the quarter ended in August, typically a slow time.

"I think it looks like a real solid set of numbers here, particularly for a Q1 at Oracle," said Jim Pickrel, an analyst at

Chase H&Q

. "

Profit margin improvement is really continuing to look very strong. I was looking for around 22% operating margins, and they came in at 29%, so that's really very solid." (Pickrel rates Oracle a buy, and his firm hasn't done underwriting for the company.)

But Oracle's applications software sales, which include the company's

E-business Suite 11i

B2B software, were softer than expected. Applications software sales grew 42% to $156 million from $109 million a year earlier. Meanwhile, the company's core database software sales grew 32% to $585 million from $443 million a year ago.

Light Sales

"Applications were slightly light to what I was looking for, but database more than made up for it," Pickrel said. "But I was looking for something north of 50% growth as far as apps are concerned." Oracle's total software sales grew 28% to $807 million from $632 million last year.

Oracle, unlike many B2B software companies, has stayed religious about offering a complete suite of its own B2B software, rather than stitching together a technology platform through buying different companies. But the problem, Pickrel said, is that few customers have been buying Oracle's complete B2B package but instead are choosing individual products within the suite.

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CEO Larry Ellison initially disputed that view on the company's conference call before actually affirming it.

"We are in fact selling the whole thing," Ellison said. "The marketing, sales, HR, accounting, they're buying the whole suite, they're buying the whole idea, and then they're installing some part of it."

Translation: Oracle is now selling the software product in pieces instead of as a complete package. Ellison described it as selling software on an as-needed basis, which gives Oracle an opportunity to sell customers more software later.

"We're selling them what they need, when they need it, so we can go back to the customer and service the account," he said. "It's healthy for our customers and healthy for ourselves."

But this process means Oracle gets less money up front, which slowed its applications software sales.


And no matter how Ellison cast Oracle's software sales, it was an area that analysts pounded away at during the conference call. Eventually, Ellison conceded that "We did not close as much on

the 11i

software in Q1 as we had thought." Ever the optimist, though, he added, "But we have tremendous momentum going into Q2."

He also took the opportunity to highlight

, the new free customer-relationship management software that Oracle recently started giving away over the Internet. Ellison said that software has been a great pilot offering for customers that want to try the company's e-business suite but don't want to buy the whole thing up front.

Meanwhile, Ellison has been on a crusade for the past 18 months to cut costs at the company, using its own Internet software. Those efforts, Pickrel said, are obviously still going strong, even after Lane's June departure. Lane was often cast as a steadying presence at the company in contrast with Ellison's flamboyant and visionary style, and many investors still wonder how the company will fare without him.

Jeff Henley, Oracle's CFO, said in a separate interview Thursday that things have gone forward as planned since Lane's departure.

"Things are not a whole lot different," Henley said. "It's a big company, and I've worked with Ray and Larry and a lot of different people. As much as I liked working with Ray, a few weeks after he left, it was like 'Ray who?' "

In the past, Ellison's interest in the daily operation of the company has been known to wane so he can spend time doing other things, such as racing his sailboat. But Henley said Ellison has continued with his renewed interest in the company since Lane's departure.

"I'm not sure anyone holds Larry in check," Henley said. "We all give Larry our counsel and our thoughts. But the main thing is that Larry has gotten more engaged in the day-to-day business. He's much more knowledgeable about it now in the day to day, because he's actually the one managing it."

In media interviews since his departure, Lane said he chose to leave Oracle because Ellison slowly took more and more responsibility from him.