Oracle earnings beat estimates, but stock tumbles

Despite posting first-quarter earnings that exceeded analyst expectations, shares of Oracle tumbled today.

At the close of regular trading, the company's stock was down $6.63, or 8 percent, to $78.31 on a volume of 60.7 million shares--more than three times its average daily volume.

Gartner analyst Timothy Tow says that although Oracle wants to redefine itself as an e-business vendor, it has yet to make the change from its current identity as an enterprise resource planning vendor. see commentary

After yesterday's market close, Oracle posted quarterly earnings that blew past analyst expectations, driven by cost-cutting measures and sales of its database software. The company also announced a 2-for-1 stock split.

The only blemish on an otherwise stellar quarter was slower-than-expected sales of the company's new business applications.

Analysts said the sell-off in Oracle shares was primarily because of profit-taking and wasn't necessarily related to the company's quarterly results.

"What you're seeing today is the Nasdaq down 66 (points)...and a general sell-off in technology stocks," said Jim Mendelson, an analyst at Wit SoundView. "I don't think there's anything truly out of (Oracle's) quarter that is ultimately responsible for" the stock slip.

Though there has been some debate over Oracle's slower-than-expected sales growth in its applications business, Mendelson simply called that "nitpicking."

"They had a stellar quarter," he said. "We still have our price target at $96 (a share), and we still have them at a 'strong buy.'"

A string of investment firms today reiterated their "buy" ratings on Oracle's stock, including Banc of America Securities, Frost Securities, Chase Hambrecht & Quist, Lehman Brothers and Donaldson Lufkin & Jenrette.

The database giant reported net profits of $501 million, or 17 cents a share, for its fiscal first quarter, compared with $237 million, or 8 cents a share, during the same period last year.

Analysts had been expecting earnings of 13 cents a share, according to market researcher First Call/Thomson Financial. The so-called whisper number, however, was around 15 cents a share, said Chuck Hill, a First Call spokesman.

Revenues for the quarter reached $2.3 billion, a 15 percent gain over the previous year. That figure matched the $2.3 billion that many analysts had expected.

Driving that revenue figure was a 32 percent year-over-year growth in Oracle's core database business, which serves as a barometer of the industry titan's financial health. Analysts, meanwhile, had expected database sales to shoot up nearly 25 percent year-over-year. Database sales reached $585 million for the quarter.

In the previous quarter, Oracle's shares took a hit when it reported lower-than-expected growth in its database sales--a mere 12 percent.

Meanwhile, Oracle's applications business, which has become a strong seller for the company, grew 42 percent. An important contributor was sales of its e-business suite. Although sales grew at a healthy clip, applications sales fell short of Wall Street's expectations of nearly 70 percent growth.

"This is the best first quarter we've had for our software business in six years," CEO Larry Ellison said in a conference call. "We think we're off to a tremendous start, and it will get better and better and better."

Ellison and chief financial officer Jeff Henley said the company's fiscal second quarter is shaping up to be a "robust" period for the company.

"Our pipeline looks good again (in the second quarter), especially in applications," Henley said. He added that the applications business may grow 50 percent this year and noted he wouldn't be surprised if it reached up to 100 percent.

Although the database business is expected to grow, its performance may pale a bit against the strong growth in the first quarter, Henley cautioned.

Oracle's services business is expected to grow 2 to 3 percent a quarter for the remainder of the year, while operating margins are anticipated to show continuing improvement, the executives said.

"There's still a lot of head room left in the margins," Ellison said.

Analysts applauded Oracle's performance.

"They didn't blow out the revenue number but they did on the earnings," said Mendelson.

He added that although Oracle did not turn in better-than-expected revenue figures, the company managed to keep in line with estimates at a time when overseas currencies were a drag on revenues.

Investors tend to reward software companies such as Oracle for posting strong revenue growth, more so than for pulling in stellar profits, analysts note.

The company reported operating margins of 29.1 percent, an improvement over the previous 17.4 percent a year ago. Analysts, such as Chris Shilakes of Merrill Lynch, had anticipated margins of 24.4 percent.

Earnings were announced after market close. At the end of regular trading, the company was up $3.13, or 4 percent, at $84.94. But in after-hours trading, Oracle's shares dipped to $83.45.

Although some analysts said Oracle's rich valuation would make it difficult to propel the stock much further despite any growth in operating margins, Mendelson said he expects Oracle's share price to rise tomorrow.

"I think the stock should trade up. I don't argue that the price is up, but with the stock split, a healthy revenue performance in an environment where the exchange rate was a deflator and strong revenue growth for its licenses, I think it will do well tomorrow," Mendelson said.

Oracle also announced a 2-for-1 stock split for shareholders of record as of Sept. 25.

News.com's Melanie Austria Farmer contributed to this report.