Oracle met analysts' third-quarter earnings estimates Thursday, aided by double-digit growth in both new software licenses and its license updates and support business.
The software maker reported revenues of $2.5 billion for the quarter ending Feb. 29, compared with $2.3 billion a year ago. Analysts had expected the company to generate $2.51 billion, according to Thomson First Call.
Net earnings were $635 million, or 12 cents a share, compared with $571 million, or 11 cents a share, in the same period a year ago. The company was expected to report net income of 12 cents a share, according to Thomson First Call.
"We have a target of annual (profit) margins of 40 percent, and we're closing in on that target," Ellison said during a conference call with analysts. "Part of the story is cost control. The rest of the story is a fundamental reshaping of our business. Our largest business is license updates, and it's the most profitable. It is also the fastest growing portion of our business. Our consulting business is getting smaller, because it's getting easier to install and tune our databases. This has the lowest (profit) margins of our business. So, our low-margin business is getting smaller and our most profitable business is getting larger."
New software licenses rose 12 percent to $847 million, while software license updates and product support grew 17 percent to nearly $1.2 billion.
Oracle's services business, however, fell to $486 million in the quarter, down from $547 million.
But Ellison highlighted the growth of the company's database business, which rose 16 percent in the quarter. He attributed that growth to Oracle's real application clustering, or RAC, option, which is a technology that lets customers cluster databases together, creating more computing power.
"Our RAC option indicates rapid acceptance of our Oracle 10g product," Ellison said. "And a good 25 percent of those sales are on the Intel-Linux platform."
Sales of the RAC option rose 86 percent, Ellison said.
The performance of Oracle's database business came out a little stronger than Wall Street had anticipated, and its applications business was a little weaker, analysts said.
"Oracle had a heavier mix in database growth than people were expecting. But that's probably good news when you're a database company," said Charles Di Bona, an analyst with Bernstein & Co. "I think Wall Street wasn't expecting them to be up by 16 percent and its applications business flat. I was expecting more of an even split in growth, somewhere in the 10 percent range for each."
One analyst, Jim Mendelson with Schwab SoundView Capital Markets, said Oracle's operations may have benefited from the company's introduction of its 10g database, or grid computing.
And in sizing up Oracle's future performance, Mendelson said the applications business will be hard to predict.
"Apps numbers are more volatile and harder to forecast. I would imagine (Oracle) will be pretty upbeat for the (fourth) quarter," Mendelson said.
Other analysts, such as Di Bona, said the applications industry is undergoing a difficult period, much more so than some on Wall Street had realized.
"PeopleSoft's annual report came out and their applications business fell 20 percent. SAP was flat but gaining share. Structurally, the market is weak," Di Bona said. "Expectations published by Wall Street have been aggressive for the apps guys. But it's infrastructure where we've seen stronger spending. BEA was up in the single digits last quarter, and IBM's infrastructure business is doing well too."
The relationship between infrastructure software and applications software is cyclical, Di Bona noted. As customers re-architect the backend of their business, it?s the equivalent of erecting framing for a new house. The demand for applications will follow once the framing is done.
"You have to put up the two-by-fours before you can throw up the drywall," said Di Bona, adding he expects the applications business to recover around 2005 to 2006.
Oracle's chief financial officer, Jeff Henley, said the company anticipates modest improvement in software spending between now and December.
"Based on external surveys, we see modest improving in software spending for 2004," Henley said.
Shares of Oracle fell in after-market trading to $12.17. During the regular session, Oracle closed down 16 cents, or about 1.3 percent, to $12.25.
On the expense side, Oracle said the price tag for its fight to acquire PeopleSoft has risen to $43.4 million during a nine-month period. Those costs are for professional fees associated with its tender offer.