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

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Why Oracle Wants Solaris

With its future apparently secure, the benefits of Sun's operating system become compelling. Oracle praised the Solaris operating system when it agreed to acquire its creator, Sun Microsystems, but the actual beauty of this fine piece of engineering was left unexplained. Here's a look at the advantages of Solaris for business computing and insights into what Oracle's long-term intentions may be for the operating system.

No matter what your attitude is toward Oracle's products, management style and strategy, anyone running a large or small data center should breathe a sigh of relief now that the long-term viability of Solaris is assured. Without an acquisition by Oracle or Cisco ( CSCO - news - people ), Solaris might have been put on the proverbial shelf, a tribute to what the fine engineers at Sun could do back in the day. But now that Solaris will receive the marketing support that it deserves, information technology staff should be taking a close look at the operating system for the following reasons.

Superior virtualization: In the Linux world, virtualization is performed by multiple parties. One organization or company does the hypervisor (Xen, VMware ( VMW - news - people ), Citrix, Parallels), the virtual layer on top of the hardware. Another organization (the Linux community) adapts the operating system to better support virtualization. What Solaris offers IT is a top-to-bottom engineered approach to virtualization where the hardware, the hypervisor, the OS and the ZFS file system are all designed to deliver optimal performance and manageability. Solaris Containers are a lightweight but powerful virtualization option with very low processing overhead (2% vs. about 20% for a hypervisor). Linux will get there but at a slower pace as the multiple parties involved negotiate with each other. Microsoft ( MSFT - news - people ) also offers a unified virtualization stack but it remains to be seen if Windows can ever achieve as wide adoption in the server space.
Scalability for Large Scale Multiprocessing: Benchmarks shows that Linux stops providing benefits at four processors. You can add more, but performance won't get much better. Solaris has been engineered to support massive multiprocessing. If you need to scale a single box, you can add dozens of processors, and Solaris boosts performance accordingly. Solaris also has the most scalable networking support of any operating system on the market.

Reliability: Linux has long been successful in data centers because it is less error prone than Windows, which frequently requires machines to be rebooted. Solaris takes reliability to a new level. A feature called predictive self-healing allows failed hardware components to be swapped out without rebooting.

Security: The security in Solaris benefits from the same engineering quality as the rest of the operating system. Sun's security DNA comes from its experience supporting financial services computing and e-commerce. Solaris was designed for secure networking and provides many security features, including role-based access control, a firewall and secure out-of-the-box settings.

Administration: Solaris has administration functions that allow mass changes to be made to many instances of an operating system at once and features that allow one master machine to be replicated to many other machines running a copy of the operating system. The administration capabilities have been expanded to cover the challenges of running a large number of virtual machines.

Flexible Deployment: Solaris is offered both as a fully supported commercial product and as OpenSolaris, a leading-edge open source version where the latest features are tested. Solaris 10 can run Solaris 8 and 9 apps in containers. Further, Solaris runs on a huge range of hardware from x86 Intel platforms to high-end RISC servers. Solaris can run on any hardware platform, not just on Sun hardware.

Green IT: As they say at Sun, "You can't be green without the Sun." While that may not be always true, it is true that Sun's SPARC chip set and its servers are among the most energy efficient on the market, in some cases qualifying for utility rebates. Performing a server consolidation using Solaris and Sun hardware provides an easy way to lower carbon footprint but maintain high performance.

With Sun at the helm, you could easily get the idea that Solaris was created as a public service. Sun has never seemed like it was in business solely for the money. At Oracle, green is always a top priority, as it should be, and Larry Ellison is swooning about Solaris because he sees it as key to a new kind of offer to Oracle's customers. But what is that offer?

My guess is that the "Industry in a Box" vision mentioned by Charles Phillips, Oracle's co-president, will actually become the next wave of cloud computing. In a previous column, I recommended that Google ( GOOG - news - people ) get into the appliance business. My guess is Oracle will follow this path with a vengeance. Solaris will power Oracle's cloud offerings, but through appliances, Oracle will bring the cloud to the data center.

Remember that Google, the leading provider of large-scale computing services in the cloud, does so by building its own hardware and software that is integrated and optimized for the task. I believe that Oracle recognizes that there are limits to the amount of enterprise IT that can be put into the cloud. Problems such as security, disaster recovery and moving huge amounts of data are significant barriers to cloud migration. But many of the same economic and operational benefits of the cloud can be achieved through remotely managed appliances that integrate software and hardware in one box. Oracle can run these over the Net using the Smart Services model I wrote about in Mesh Collaboration. The customer gets all the benefits of the cloud without having to move data off premise.

With the acquisition in place, the installed base of Solaris will grow as more companies discover the brightly shining benefits of this operating system.

Author: Dan Woods

Dan Woods is chief technology officer and editor of Evolved Technologist, a research firm focused on the needs of CTOs and chief information officers. He also consults for many of the companies he writes about. For more information, go to www.evolvedtechnologist.com.

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Oracle Launches Asia Pacific Virtual Tradeshow

Oracle Corporation is inviting everyone to join the interactive conversations at Oracle’s Applications Unlimited Experts Live! virtual show.

The action-packed day kicks off in high gear on June 16, 2009, 10AM to 4PM with a compelling keynote from Ed Abbo, Oracle’s Senior Vice President of Applications Development.

This FREE virtual show provides convenient access to valuable product updates and the chance to learn more about the trends and technologies that can help companies gain competitive edge in today’s uncertain times. Drop in and attend what interests you, when you like, without leaving your desk.

During this one-day virtual show, attendees can visit Oracle Applications booths, interact with Oracle experts, experience the latest product demos and network with peers.

Attendees can expect to get a better understanding of how Oracle Applications can benefit their organizations through customer case studies featuring companies in the Asia Pacific region such as Maruti Suzuki, LG Electronics, Australian Vintage, VicUrban, Sinosteel, Yarra Valley Water, HPCL and STX Shipbuilding.

Relevant presentations for both the regional and local market include the value of business process outsourcing (BPO), Software-as-a-Service (SaaS) and customer relationship management (CRM) on Demand in the region.

For more details, please visit www.oracle.com.

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