Oracle's PeopleSoft Party Continues

CEO Larry Ellison touts the ability to create pricing leverage.
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Updated from 2:02 p.m. EST

It was billed as an analyst day, but

Oracle's

(ORCL) - Get Report

semiannual meeting with Wall Street seemed more like a pitch for Larry Ellison's plan for world domination.

The brash billionaire and his minions promised investors that the company would pay off the $9.2 billion debt remaining from its acquisition of PeopleSoft by the end of fiscal 2006, push margins to 50% within four years and, armed with the cash generated by the acquired company, drive EPS growth to a compound rate of 20%.

And as they say on the late night TV commercials -- wait, there's more. Oracle claims that the new version of its application server is so good, it will allow the company to go head-to-head with the two leading suppliers of business intelligence software,

Business Objects

(BOBJ)

and

Cognos

(COGN)

.

Both companies are currently Oracle partners, but Executive Vice President Charles Rozwat said he was confident that the newly competitive relationship would not stop the companies from working together, much as

SAP

(SAP) - Get Report

cooperates with Oracle despite the intense rivalry between the two companies.

Earlier in the day, Oracle raised its guidance for 2006, and CEO Ellison said newly acquired PeopleSoft will help the database giant get back on the acquisition trail.

Ellison said he intends the company to become No. 1 in the application server business by a combination of organic growth and acquisitions. Although Ellison did not mention a candidate, he has in the past said that

BEA Systems

(BEAS)

is a company he would like to buy should the price be right. Also on the shopping list: companies that can help Oracle become the leader in more industry-specific applications.

Ellison referred repeatedly to economies of scale as a key benefit of the PeopleSoft acquisition and said "one of the nice things about being bigger is pricing -- you can use it as a weapon. And we will. But we won't go crazy about it."

The software company said that it expects pro forma earnings of 62 cents a share in the current fiscal year and 76 cents to 80 cents a share in fiscal 2006. Analysts surveyed by Thomson First Call were forecasting pro forma earnings of 62 cents a share this year and 70 cents a share next year, with the extra 8 cents coming from PeopleSoft, which Oracle acquired earlier this month for $10.3 billion, after an 18-month struggle.

Not all of the analysts at the meeting were inclined to accept those numbers. "Given the cost of capital

that Oracle needs to pay for the acquisition this is risky. A lot has to go right for it to work," said Sanford Bernstein analyst Charles Di Bona, who has been skeptical about the merger's chances to succeed for some time.

But Tony Ursillo, an analyst with Loomis Sayles & Co., said "76 cents is pretty much a slam dunk for 2006" based on the stream of maintenance dollars.

Before the acquisition, Oracle's five-year plan called for compounded annual earnings growth of 15%, discounting currency benefits and acquisitions. Now, said Ellison, cash generated by the PeopleSoft acquisition should push that growth rate into the mid-20s.

Traders shrugged off the robust earnings outlook. Oracle gained just 3 cents to close the day at $13.62.

Rick Sherlund, the influential Goldman Sachs analyst, was more enthusiastic. "There are likely to remain lingering execution concerns for the bears, but on balance we believe the accretion potential provides more fuel for the bulls," he said in a note to clients. "While there are execution risks, we believe they can be effectively managed by Oracle and believe the stock is likely to benefit as investors gain confidence in the integration efforts over the next quarter or two, and the valuation provides considerable upside potential."

Oracle CFO Harry You said his company originally expected a restructuring charge of somewhat more than $1 billion for the acquisition, but it turns out that charges will be lower. Charges related to the layoff of PeopleSoft and the disposal of the former company's real estate will run $400 million to $600 million. Similar charges related to Oracle are expected to range from $100 million to $300 million.

Other financial goals include the maintenance of AAA credit ratings and annual growth of operating margins.

Oracle has stated that holding on to most of PeopleSoft's development and support staff was crucial to its goal of keeping customer churn to a minimum. And in the midst of the meeting, Oracle co-President Safra Catz stood up and announced that more than 90% of those PeopleSoft team members offered jobs at Oracle have accepted, and more are likely to follow.

Commenting on her announcement, J.P. Morgan analyst Adam Holt, said he has been impressed with the resources Oracle has put into support and development of PeopleSoft products. "It makes me more comfortable with the acquisition," he said.