Databases, margin growth carry Oracle past 1Q estimates

Unexpectedly strong growth in database software balanced out slower-than-anticipated applications sales as Oracle (Nasdaq: ORCL) easily surpassed the consensus earnings estimate in the first quarter.

After market close Thursday, the world's second largest independent software vendor reported fiscal first quarter net income of $501 million, or 17 cents per share. First Call's survey of 28 analysts predicted a profit of 13 cents per share for the quarter ended Aug. 31.

Also Thursday, Oracle announced a 2-for-1 stock split, to take effect after market close Oct. 12 for shareholders of Sept. 25 record. It will be the tenth stock split for Oracle since the company went public in March 1986. Oracle currently has more than 2.8 billion shares outstanding.

Shares of Oracle traded as low as 82 before rebounding to 83.2813 in relatively strong afterhours activity of more than 870,000 shares on the Island electronic communications network, following the earnings report. Oracle stock rose 3.125 to 84.9375 in Thursday's regular trading ahead of the release of quarterly results, and volume was strong on call options.

First quarter revenue rose 14 percent year-over-year to $2.3 billion, roughly in line with many analysts' expectations.

"Business continues to be extremely robust," CFO Jeff Henley said during a Thursday afternoon conference call with analysts. "We continue to be very bullish not only for the quarter but for the year. ... It's a function of the market in general, and also the message and function of our particular products, both in applications and database."

Net income growth outpaced sales largely because of margin improvements; first quarter operating margins increased to a greater-than-expected 29.1 percent, from 17.4 percent in the comparable period a year earlier. Company executives more than a year ago set a goal of cutting annual costs by $1 billion, and currently have a goal of 40 percent operating margins for fiscal 2001.

"The margin story just continues to be spectacular," Henley said.

Oracle reported the best first quarter revenue growth the company has seen in six years. However, some observers might be disappointed in the revenue distribution.

Applications sales of $156 million represented a 42 percent growth from the year-ago period, but At least two analysts, Chris Shilakes of Merrill Lynch and Rick Sherlund of Goldman Sachs, expected a far better performance from applications, which many believe are the key to Oracle's long-term growth. In a research note, Shilakes forecast 70 percent growth in applications, driven by Oracle's 11i Web suite.

Demand for 11i remains strong, but the product has a longer sales cycle than previous iterations, CEO Larry Ellison told analysts. The 11i suite will "absolutely" produce significant sales that show up in second quarter results, Ellison said.

"If Q1 for applications is a little bit slow, that does not mean Q2 for applications will be a little bit slower," Ellison said. "It means Q2 will be spectacular. Spectacular."

Predicting applications growth is difficult, because the market for Internet-focused suites is still new, Henley said. Oracle should be able to manage at least 50 percent applications growth for the fiscal year, the CFO said, adding that even 100 percent is theoretically possible. "It wouldn't surprise me if we do as high as that," Henley said.

Revenue from Oracle's core database business increased 32 percent to $585 million, more than expected. Services revenue rose 8 percent to $1.5 billion.

Database growth should stay strong for the rest of the fiscal year, though probably not at the first quarter level, executives said. Oracle is taking database market share from Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM), Ellison said.

"We're not losing any deals to MSFT at all, and very few to IBM," he said.

Services revenue growth should rise 2 to 3 percentage points each quarter for the rest of the year, Henley said.

Oracle's productivity gains should translate into faster overall revenue growth in fiscal 2001, executives said. Morgan Stanley Dean Witter on Thursday morning upgraded Oracle to a "strong buy" from an "outperform" rating.

Wall Street expected a strong report from Oracle.

"The feeling is that it is going to be a good, positive number," said Alan Ackerman, senior vice president and market strategist at Fahnestock & Co.

Analysts are especially encouraged by Oracle's increased efficiency. "They've been showing significant improvement in operating profitability," Wit Soundview analyst Jim Mendelson told ZDII this week. "I'm optimistic that they had a very strong quarter, and certainly all input I've got would support that.">