Oracle tops estimates despite sales drop

A rise in license updates and product support revenue help the database maker exceed forecasts, but sales declined for the sixth consecutive quarter.

Alorie Gilbert Staff Writer, CNET News.com
Alorie Gilbert
writes about software, spy chips and the high-tech workplace.
Alorie Gilbert
3 min read
Fueled by a rise in license updates and product support revenue, Oracle's earnings Wednesday exceeded analysts' forecasts, even though its sales declined for the sixth consecutive quarter.

The database giant earned $535 million, or 10 cents per share, for the second quarter, compared with a profit of $549 million, or 10 cents per share, a year ago.

Financial analysts expected the company to report earnings of 8 cents a share on $2.2 billion in revenue, according to research firm First Call.

Revenue for the quarter ending Nov. 30 fell from $2.38 billion a year ago to $2.31 billion this year. License revenue for the quarter--a key financial indicator--declined to $765 million, down 7 percent from the same period last year, while services revenue dropped 11 percent to $590 million.

The company reported an 8 percent rise in license update and product support revenue, which totaled $954 million for the quarter.

For the third quarter, Oracle expects earnings of 9 cents to 10 cents per share on flat to 4 percent growth in revenue compared with the previous year--in line with consensus analyst estimates from First Call. In addition, the database maker anticipates third-quarter license revenue will either rise 5 percent or fall 5 percent from the $777 million posted the previous year. Oracle's third quarter ends Feb. 28.

Jeff Henley, Oracle's chief financial officer, forecast in a conference call with analysts that the third quarter would mark a "modest industry recovery" and the end of a year and a half of declining sales at Oracle.

"We are more optimistic right now than we've been since the industry slumped two years ago," he said.

Henley said business applications sales, particularly in the Americas, were hit hardest in the second quarter. By contrast, its database business improved. New license revenue from business applications in the Americas fell 50 percent year-over-year to $51.5 million. Worldwide, Oracle did better, with new license revenue from business applications falling only 34 percent year-over-year to $108.1 million. New license revenue from database technology grew 5 percent, worldwide, to $643.4 million.

Total revenue from software licenses, both new and renewed, was nearly flat at $1.4 billion. Separated out, however, new software license revenue fell 6 percent.

Right now, Oracle is in the midst of restructuring its sales force in an effort to reverse its declining applications business in the Americas region, said Larry Ellison, the company's chief executive officer.

Ellison explained that Oracle is training its salespeople to specialize further in applications and database product lines as well as in vertical industry expertise. The company has also hired new sales managers, formerly with business consulting firms KPMG and PricewaterhouseCoopers, to help build renewed sales efforts.

"We think we had structure problems with our selling organization historically," said Ellison.

Henley stressed that the sales reorganization would not cause any major upheavals for Oracle customers. However, he warned that the change could cause disruptions within Oracle's sales force, posing a risk to third-quarter earnings.

Oracle eliminated 850 jobs in the second quarter, 2 percent more than anticipated at the beginning of the quarter, Henley said. The company will cut "a couple hundred" more jobs during the third quarter, he added.

For the second quarter, Oracle toed the line on operating margin at 34 percent, equal to last year.

The company's shares traded up on the announcement, rising to $11.14 in after-hours trading Wednesday, according to the latest numbers on the Island ECN Web site. The stock closed at $10.62 before the company announced quarterly results.