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High hopes hurt Oracle stock

Oracle's fourth-quarter numbers met expectations, but investors seem disappointed it didn't exceed them.

Oracle (ORCL) saw its stock fall today despite reporting record fourth-quarter revenues yesterday that matched Wall Street's expectations.

After surpassing its five-year high earlier this month, Oracle's stock closed at 50-3/8, down 2-7/8 from yesterday.

"The last couple days, people talked up the stock and maybe people thought the earnings would come in higher than the estimates," said Neil Herman, an analyst with Salomon Brothers. "This is a case of profit-taking."

Today, Gruntal & Company raised its fiscal 1998 earnings estimate to $1.44 a share from $1.36 a share but maintained its rating of "hold."

James Moore, an analyst with Alex. Brown, said today: "Overall, the fourth-quarter results were solid in our opinion as the company continued to demonstrate impressive growth as it continues to gain share vs. its major competitors."

The analyst reiterated his rating of "strong buy" but trimmed his 1998 earnings per share estimate to $1.70 from $1.75. Moore established a fiscal 1999 forecast of $9.3 billion in revenue and an earnings estimate of $2.15.

"With a strong new-product cycle, high value-added technology, a solid strategy to drive larger deals, and a management team that continues to execute extremely well, we believe the stock will continue to be a strong performer...fiscal year 1998 is already off to a good start. The pipeline for the first quarter is in very good shape," Moore said.

The company, which historically has a strong fourth quarter, reported earnings of $359.9 million, or 54 cents a share, for the quarter ending May 31, up from $266.3 million, or 40 cents a share, a year ago.

Revenues jumped 33 percent to $1.95 billion for the quarter, up from $1.46 billion a year ago.

"We had a really good quarter, but what people don't realize is that Q4 was tough to beat because we had an unbelievable Q4 a year ago," said Jeff Henley, chief financial officer.

Applications licensing drove the strong revenue growth, with a 78 percent increase over year-to-year sales. Overall license and related sales jumped 26 percent to $1.13 billion in the quarter, compared with year-ago figures.

Services, however, soared by 45 percent to $818.4 million in the quarter, compared with year-earlier figures.

For the year, revenues from services narrowed the gap in its contribution to Oracle's overall revenue. Services accounted for 49 percent of total revenues, up from 46 percent a year ago.

But next year, the source of the majority of Oracle's revenues is expected to shift.

"I think next year's services will be larger than our licensing and applications," Henley said. "Services generate about the same [profit] margins as our licensing business--and is a little more predictable."

Oracle's share price has been on a roll. The stock has virtually doubled, climbing from around 35 in late April.

Wall Street had expected Oracle to maintain its strong quarterly growth, which helped propel its stock price. Another recent boost came from Oracle's long-awaited preview earlier this month of its Oracle 8 database.

Oracle 8 will formally launch June 24. It is the key piece to the company's software architecture and a major part of its plans to foster the development of network computers.

But Henley said Oracle 8 is not expected to bring a bonanza of revenue in the first quarter, given that customers do not pay for the software upgrade.

"It's not like selling a new version of Windows," Henley noted. But he said Oracle 8 will likely give the database company greater market share.

Oracle's revenue growth has kept pace with its previous quarterly revenue growth of more than 30 percent on a year-to-year basis for at least the past year. This is in spite of the rapid increase of the company's overall size, which typically makes it more difficult to maintain high growth-rate levels.

Reuters contributed to this report