Oracle shares down as outlook gives pause

Fourth-quarter results top expectations, but forecast disappoints. Shares of Oracle Corp. slipped in early trading Friday after the software giant reported a 27% increase in fourth-fiscal-quarter profit but issued a forecast that was at the low end of expectations.

Oracle's recent results beat Wall Street's estimates despite worries that a sluggish U.S. economy could crimp sales. The company said net income for the period ended May 30 rose to $2.04 billion, or 39 cents a share, from $1.6 billion, or 31 cents a share, in the year-earlier quarter.

Excluding special items, Oracle said net income for the quarter would have been 47 cents a share. Analysts were expecting earnings of 45 cents a share for the period, according to estimates from FactSet Research.

Revenue rose 24% to $7.24 billion. Wall Street had been expecting revenue of $6.85 billion. Oracle had previously projected revenue growth of 14% to 18%.

Shares of Oracle had run up nearly 20% in the past four months before the report. The stock slipped about 3% in early trading Thursday, moving down 65 cents to $21.90.
In a conference call late Wednesday, Oracle Chief Financial Officer Safra Catz said the company's strong sales should carry into its current quarter. But the company projected that earnings would come in between 24 and 27 cents a share for the period. Analysts were looking for 27 cents a share for the quarter.

"These numbers imply full-year license growth of 9%, which we believe is overly conservative even under adverse macroeconomic conditions given Oracle's ongoing market share gains in apps and middleware," Peter Goldmacher of Cowen & Co. wrote in a note to clients Thursday.

Tom Ernst of Deutsche Bank was less optimistic, writing that the company's strong fourth quarter was likely the result of heavy buying ahead of a planned price increase, which may have pulled sales out of the current period.
"While these tactical moves are consistent with Oracle's strategy to gain data center share in large enterprises, both bring business forward, are more likely to lead to shelfware and customer challenges, and potentially sacrifice longer-term growth," he wrote.

BEA's contribution

Oracle's most recent large acquisition was of so-called middleware provider BEA Systems Inc. in an $8.5 billion deal that closed in April. Middleware is used to connect disparate networks and programs.

While Catz said BEA delivered strong performance in the fourth quarter, she tempered expectations for the first quarter, saying BEA likely won't contribute more than $50 million to $60 million in new software-license revenue in the current period.
Oracle has expanded well beyond its roots as a database software provider by building up its middleware business and an applications software business to rival that of German goliath SAP AG.

Overall sales of new software licenses in the fourth quarter rose 27% over the year-ago quarter, Oracle said. The company had issued guidance for new license growth to be between 10% and 20% in the quarter. "We don't think our strategy is in any way running out of gas," Catz said. In a nine-inning baseball game, "I don't think we're even in the second inning at this point," she said. But while Oracle's fourth quarter is typically its strongest, its first quarter usually doesn't fare as well.

Catz said the company expects total revenue to grow between 18% and 20% in the first quarter from the total in the period a year earlier of $4.53 billion, while new software-license revenue should grow between 10% and 20%.

Author: John Letzing @ www.marketwatch.com