Oracle gains on strong 3Q earnings

Oracle shares moved up 2 1/4 to 79 1/4 Wednesday in an otherwise ugly trading day for tech stocks after it easily topped analysts' estimates in its third quarter.

After market close Tuesday, the database and business applications software vendor reported a profit of $498 million, or 17 cents a share, on sales of $2.4 billion.

First Call consensus expected the database software developer to earn 13 cents a share in the quarter.

On Wednesday, Salomon Smith Barney raised its 12-month price target to $100 a share from $85 a share.

The $2.4 billion in sales marks an 18 percent improvement compared to the year-ago quarter when it earned $277 million, or 9 cents a share, on sales of $2.1 billion.

"Oracle's database and e-Business applications have become the software standard for the Internet," said CEO Larry Ellison in a prepared release. "All 10 of the world's biggest web sites use Oracle. Ninety-three percent of the public dot com companies use Oracle."

Total net income, which includes $432 million from the sale of shares of Liberate Technologies Inc. (Nasdaq: LBRT), rose to $763 million, or 25 cents a share.

"We obviously had a spectacular quarter," CFO Jeff Henley told analysts during a Tuesday afternoon conference call.

In the quarter, database software sales jumped 32 percent to $778 million. Oracle is taking market share on the low end from Microsoft (Nasdaq: MSFT), as well as on the high end from IBM (NYSE: IBM), Ellison told analysts.

"Our database business has never been healthier," he said.

Total applications software sales increased 35 percent, to $199 million, with sales of customer relationship management applications growing at a 179 percent rate.

The company's year-over-year comparison was easier this time compared to last year, when Oracle's applications growth slowed. But Oracle executives predicted continued strong increases in applications revenue, including a 100 percent sequential improvement in the fourth quarter for CRM software.

Oracle hopes to pass Siebel Systems (Nasdaq: SEBL) as the top CRM vendor sometime in the next fiscal year, Ellison said. The company expects to surpass Commerce One (Nasdaq: CMRC) in installations Internet procurement software in the fiscal fourth quarter, Ellison added.

Consulting, education and support revenues grew 10 percent to $1.4 billion. The consulting business slowed in previous quarters because of the company's focus on increasing margins and cutting costs, executives said. Oracle cut its overall workforce each of the last three quarters, with much of that coming from consulting.

The slowdown in consulting growth is "pretty much over," Henley said.

Geographically, all regions except Europe saw strong growth, executives said. European business grew just 12 percent.

"Our European organization has to be embarassed by their performance," said Ray Lane, president and chief operating officer. "My expectation is for Europe to do a lot better. ... We've looked into their pipeline, we think they'll do a lot better in Q4."

Ahead of the earnings report, most analysts said Oracle's cost-cutting moves as well as increased corporate software spending would likely mean an upside surprise.

"There's a discernable pick up in corporate spending for database and application software right now," said Steve Palfrey, an analyst at Sanford C. Bernstein & Co. "We're expecting Oracle to post strong results for the next two or three quarters."

Henley said the company's plan to cut annual spending by $1 billion is well ahead of schedule, resulting in higher profit margins. Third quarter operating margin rose to 31.4 percent from 19.6 percent in the year ago period.

The cost-cutting plan is about half completed, Henley said. "We're very encouraged that we can continue to streamline the company, improve productivity," he said during the conference call.

Now Oracle is targeting operating margins in the 40 percent range rather than 30 percent, Ellison said.

Oracle easily topped analysts' estimates in its second quarter, pocketing $384 million, or 26 cents a share, on sales of $2.3 billion.

Thirty-three of the 35 analysts tracking the stock maintain either a "buy" or "strong buy" recommendation.

Oracle competes with a wide range of players. Competitors include Microsoft, IBM, Commerce One, i2 Technologies (Nasdaq: ITWO), Sybase (Nasdaq: SYBS), PeopleSoft (Nasdaq: PSFT), SAP (NYSE: SAP), Seibel (Nasdaq: SEBL) and Informix (Nasdaq: IFMX).

-- Sergio G. Non contributed to this report.