Oracle Does it Again

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Rich Tehrani
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Oracle Does it Again

Oracle is amazing. They reported their numbers last night and although they said future sales will be down around 10% their stock is up 6% as of this writing.

According to Dow Jones:

Revenue for the quarter was lower than Wall Street expected, reflecting both the currency impact and weaker information-technology expenditure, but cost control and a strong flow of maintenance support revenue helped Oracle hit its quarterly earnings per share guidance.

For the quarter ended Nov. 30, the Redwood City, Calif.-based business- software giant reported net income of $1.296 billion, or 25 cents a share, down from $1.303 billion, also 25 cents a share, a year earlier. The stronger dollar cut 4 cents a share from the latest quarter's per-share earnings.

Excluding stock-based compensation, restructuring and acquisition-related costs, earnings rose 9% to 34 cents a share. Assuming fixed exchange rates, the figure would have been 37 cents.

Revenue climbed 6% to $5.61 billion, reflecting a 12% increase at constant currency rates. Software revenue grew 8%, and services revenue fell 2%. At fixed exchange rates, the figures rose 14% and 5%, respectively.

After hundreds of failed acquisitions made by other companies over the years, Oracle is one of the rare companies that acquires correctly. Moreover the company's CRM on-demand strategy is paying off, showing customers really like hosted/SaaS solutions.

Analyst Ovum believes the company will continue to acquire and I agree. The strategy the company employs is working and there is no reason to change it.

I have posted the full Ovum comment below:
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OVUM COMMENT

David Mitchell, SVP IT research at Ovum 

Oracle buffeted by the market storms - execution is still the key

After market close on Thursday Oracle announced the results of its second quarter - the period ending 30 November 2008. New software licences declined by 3% to $1.6 billion compared to the same quarter last year - having been adversely affected by currency fluctuations. Likewise there was a 1% decline in quarterly net income to $1.296 billion. Two bright spots in an otherwise difficult quarter were the 13% quarterly growth in On Demand services, and a 14% quarterly growth in software licence updates and product support - both of which are recurring revenue items.

Markets are tough and uncertain

The 2Q08 results, and the guidance for 3Q08, emphasise the extreme volatility that surrounds the current technology markets. Although the third quarter ahead is important, it is not as important as the fourth quarter. The fourth quarter is the traditional Oracle powerhouse quarter and any signs of "the green shoots" of market upturn will need to be observed before the summer season begins - otherwise there is unlikely to be a significant market upturn before the autumn of 2009. 3Q08 may see short-term cost control measures but 4Q08 is the real one to watch.

When Oracle gave 2Q08 guidance during its 1Q08 conference call its President, Safra Catz, forecast that new licence revenues would grow between 2% and 12%. This was already a wide prediction but was further extended by the uncertainty over the additional impact that currency volatility was certain to bring. In the run up to the second-quarter results some financial analysts had lowered their expectations, and Oracle stock has been drifting lower in the past weeks based on these revised expectations. The bounce-back of Oracle stock in after-market trading indicates that the results had already been priced in throughout the last quarter.

Portfolio diversity and scale matter

Oracle is traditionally judged by its new software licence sales. Therefore, this looks like a soft quarter, with a 3% decline in new licence revenues. These revenues are the key to unlocking the lucrative future revenues from product updates and support - which grew 14%. However, its stock price is rarely judged by these revenue streams, despite them being highly profitable. Equally, the contribution of fast-growing revenues, such as from the CRM On Demand offerings, is often underplayed - and this has been booming recently. If Oracle did not have the scale and diversity that its massive acquisition trail of the last four years has built, then it would be in a significantly worse position than it currently finds itself. On those grounds alone, the strategy has been a success.

In a recessionary market some companies will be more resistant to decline than others. In the software market companies with a diverse product portfolio will be more resilient, as different product categories have distinctly different cyclical or counter-cyclical effects. For example, business applications typically decline more quickly than infrastructure software in a broad market decline. However, even after its acquisitions Oracle is still smaller and less diverse than the likes of IBM and HP.

Future acquisition potential and current execution

The current market conditions put Oracle in a strategic quandary. On the one hand, the recession is challenging the cash position of many companies, reducing their stock prices and making them eminently affordable for an acquirer with a strong asset base such as Oracle. On the other hand, in order to protect its existing margin streams it could be argued that Oracle should curtail its M&A aspirations and preserve cash.

Ceasing its acquisition trail would represent a major course change for Oracle, even if it was simply put in abeyance until market conditions improved. However, we expect Oracle to continue its acquisitions, with a particular focus on the industry specific software acquisitions that have become increasingly important recently. Oracle still continues to generate strong positive cash flow, with 15% year-on-year growth in free cash flow to $7.6 billion. This is enough to sustain further acquisitions. However, Oracle may well look to tighten its belt and have a keen eye on cost control in the next three quarters - to sustain margins and further strengthen its M&A potential. Execution, execution and execution will be the mantra as Oracle continues to drive consistency and performance throughout the field operation.




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