Oracle's Earnings: A Good Omen for Tech?

Fiscal fourth-quarter results from the software behemoth fueled optimism that a rally in tech stocks may continue. Wall Street took heart from a report showing better-than-expected earnings from Oracle (ORCL), the Silicon Valley software giant. Technology stocks have been on a roll this spring, and investors eyed Oracle's fourth-quarter report on June 23 for signs the rally might continue.

Sales, profits, and new software bookings for Oracle's fiscal fourth quarter ended on May 31 exceeded Wall Street's forecasts. That sent shares of Oracle up 2.7% in extended trading, after closing on June 23 down 10¢, or 0.5%, at $19.87. The shares have gained 8.8% in the past three months.

Profits declined 7% and revenues fell 5% in the period, though results would have been better if not for the effects of translating overseas sales into a rising U.S. currency. On Wall Street, analysts said Oracle's recurring revenues from technical support contracts and prudent control of expenses during the quarter helped offset currency-related declines. "Oracle continues to be a high-quality investment," says Andy Miedler, a senior technology analyst at Edward Jones who rates Oracle a "buy."

Pickup in Software Sales

Investors are lifting the shares of tech outfits including IBM (IBM), Google (GOOG), Microsoft (MSFT), and Adobe Systems (ADBE) that reported relatively healthy results during the recession by taking advantage of companies' need to buy products that can boost productivity, Miedler says. "Investors see tech companies posting fairly decent results in this environment, and they're rewarding them for it," he says. The Nasdaq composite index has risen 13.4% since Mar. 24, outpacing other indices.

Oracle executives told Wall Street analysts in a conference call that customers are beginning to buy more software, and pointed to deals closed during the quarter with Wal-Mart (WMT), American Express (AXP), Vodafone Group (VOD), and Perry Ellis (PERY). "The sense of panic and deer-in-the-headlights kind of feeling" has subsided, said Oracle President Charles Phillips.

For the fourth quarter, Oracle earned $1.9 billion, or 38¢ a share, compared with $2.03 billion, or 40¢ a year earlier. Excluding stock compensation and one-time charges, earnings were 46¢ a share, exceeding Wall Street analysts' estimate of 44¢. Revenues were $6.9 billion, vs. $7.2 billion a year earlier. Analysts had expected sales of $6.47 billion. Sales of new software licenses, a closely watched measure of future revenues, were down 13%, to $2.7 billion, but also exceeded analysts' expectations.

Weathering the Recession

Looking ahead, investors are still waiting for more clarity from the company about how quickly it can cut costs after its $7.4 billion acquisition of computer and software maker Sun Microsystems (JAVA) closes this summer, and whether it will keep Sun's server and storage business.

Keeping lower-margin hardware operations would be a strategic departure for Oracle, which generates healthy margins from sales of database, middleware, and business applications. Oracle executives indicated during the conference call with analysts that they will take a run at the hardware business. Oracle has spent more than $30 billion on 55 acquisitions since 2005 to compete with SAP (SAP) in applications software, and with IBM in the market for application-connecting middleware.

The company has withstood the worst effects of the slow economy because of recurring revenues from support contracts. Excluding stock compensation and charges for acquisitions, Oracle's operating margin was 51% during the quarter. Annual fees paid by customers for the rights to new versions of Oracle's software and for technical support accounted for 44% of Oracle's fourth-quarter revenue, and the contracts are considered highly profitable. "The margin story has to do with our enormous installed base of customers who renew their agreements with us every year," Oracle President Safra Catz told analysts.

The company's profit margin will undoubtedly fall after the Sun deal closes, but analysts say the expected declines are reflected in Sun's stock price, and that investors view the acquisition as a positive. "Oracle is a pretty boring story without Sun," says Yun Kim, an analyst at Broadpoint AmTech (BPSG), who has a buy rating on Oracle's stock.

Sun's Hardware Business is Promising

Catz told analysts to expect a decline in sales of 1% to 4% for the first quarter that ends in August, and earnings of 29¢ to 31¢ per share. Oracle also declared a dividend of 5¢ per share payable on Aug. 13.

Brent Thill, director of software research at Citigroup (C), who also rates Oracle a buy, told clients in a June 22 research note that although investors usually fear a "seasonal drop-off" in sales during Oracle's traditionally slow summer quarter, prospects of an economic recovery and the imminent closing of the Sun acquisition "will outweigh those issues." When Oracle announced the deal on Apr. 20, it said Sun would add at least 15¢ per share to its non-GAAP (generally accepted accounting principles) income in the first full year after closing.

Despite calls by some investors for Oracle to sell Sun's hardware business and keep its software products, Oracle executives said they have the opportunity to deliver products that combine Sun computers with Oracle software in a way that gives information technology departments more confidence that the hardware and software will work well together. To underline the point, Oracle Chief Executive Larry Ellison spent half his speaking time on the conference call talking up the virtues of a product called Exadata that runs Oracle's database on Hewlett-Packard (HPQ) hardware.

Ellison's willingness to jump further into the computer hardware market by buying Sun has deep roots, says John Wookey, an executive vice-president at SAP, who left Oracle early in 2008. Ellison used to personally fix errors in programs running on old IBM mainframe computers, according to Wookey. "Larry likes hardware," he says.

If he demonstrates that affection by keeping Sun's hardware assets, investors will focus on whether he can run a hardware business as well as the software juggernaut he's assembled.

Author: Aaron Ricadela @ http://www.businessweek.com

Read more ...