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Oracle earnings beat Street
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December 14, 2000: 6:12 p.m. ET
Oracle's second quarter beats estimates as application sales rise 66 percent
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Database and corporate applications software giant Oracle Corp. Thursday reported fiscal second quarter results that beat Wall Street's expectations, driven by a 66 percent increase in applications software sales and widening operating margins.
After the close Thursday, Oracle (ORCL: Research, Estimates) reported that its second-quarter earnings rose 62 percent to $623 million, or 11 cents per share, from $384 million, or 6 cents, in the same period last year. The mean analyst expectation for Oracle's earnings was 10 cents per share, according to earnings estimate tracker First Call.
Revenue increased 14.6 percent to $2.66 billion from $2.32 billion in last year's period. That was in line with what analysts had expected.
 While Oracle is primarily known for its leading database software used by thousands of companies around the world, its sales of non-database applications are growing rapidly. The company has a product line called the e-Business Suite that contains components for financial management, manufacturing, procurement, human resources, and marketing, among other areas.
The e-Business Suite competes against software products from PeopleSoft (PSFT: Research, Estimates), SAP (SAP: Research, Estimates), i2 Technologies (ITWO: Research, Estimates), and Siebel (SEBL: Research, Estimates), to name a few.
Oracle reported that its applications software sales increased 66 percent to $279 million, while database software sales grew 19 percent to $775 million. Total software license revenue was up 25 percent to $1.1 billion, while total service revenue increased 9 percent to $1.5 billion for the quarter.
Database growth rate lower than expected
While Oracle's total revenue was right in line with analyst estimates, the composition of its revenue was somewhat different than had been forecast. The growth rate of database software was less than what most analysts had expected, while applications software revenue increased more than they had forecast. Lehman Brothers analyst Neil Herman, for example, had expected Oracle's database sales to increase 22 percent and its applications business to rise 58 percent.
In its earnings press release, Oracle emphasized its applications business, rather than the database software that made the company into the second largest software company in the world.
"Our applications business is strong and getting stronger," said Oracle CEO Larry Ellison in a statement. "Oracle's new e-Business Suite puts every aspect of a business -- marketing, sales, service, procurement, supply chain, manufacturing, accounting, human resources -- everything, on the Internet. All the applications in our suite are designed and engineered to work together, so customers buying the entire suite don't need to do any systems integration."
"This quarter's results prove that we're winning more and more of these best-of-breed battles against Ariba (ARBA: Research, Estimates), i2 (ITWO: Research, Estimates), Siebel (SEBL: Research, Estimates), and other niche specialists," Ellison added. "And once a customer uses one of our applications, it's just a matter of time before they move to the entire suite. Systems integration is so complex and expensive that nobody really wants to do it."
Ellison told Moneyline he expects Oracle's application business to accelerate going forward.(300K WAV) or (300K AIFF)
Currency impact, looking forward
Not counting the impact of currency fluctuations, quarterly applications software sales were up 73 percent, while database software sales were up 26 percent. Total license growth increased rose 32 percent on a constant-currency basis. Oracle has had 19 consecutive quarters of negative currency impact on revenue, with the fiscal second quarter being the worst, CFO Jeff Henley said on a conference call.
"We're very optimistic about the third quarter and beyond," Henley said on a conference call. "We have seen no slowing of our business, even though we believe that the U.S. economy and the PC industry are slowing. Our business is not at all correlated with the PC industry. We are fortunate to be in the right place at the right time."
Looking forward to the third quarter, Henley forecast that database revenue will grow 15-to-20 percent in nominal terms, or 20-to-25 percent in constant dollars. He sees application software sales rising 75 percent in nominal dollars or 80 percent in constant dollars. Oracle forecasts that its earnings per share in the third quarter will be 12 cents, which is the same as the current consensus estimate, according to First Call.
Henley's remarks came on the same evening that rival Microsoft told its investors that a worldwide slowdown in personal computer sales will result in disappointing profit and revenue.
In a statement issued after the closing bell, Microsoft (MSFT: Research, Estimates) said its revenue for the all-important fiscal second quarter is now expected to be between $6.4 billion and $6.5 billion, while earnings per share will come in between 46 cents and 47 cents. That's 5 percent-to-6 percent below the company's prior guidance. The most recent consensus estimate of analysts polled by earnings tracker First Call was for Microsoft to earn 49 cents per share on revenue roughly $6.8 billion.
Margin expansion drives earnings
Oracle's earnings have grown much faster than its revenue over the past 12 months because its operating margins have expanded dramatically. Simply put, its overhead costs have remained flat, while revenue has grown. In the fiscal second quarter, the company's operating margin hit 35.6 percent, up almost 11 percentage points from 24.8 percent in the same period last year. Margins have grown 17 percentage points over the last two years.
Lehman's Neil Herman had forecast that Oracle's operating margin would be 31.4 percent in the second quarter, while Merrill Lynch analyst Chris Shilakes had predicted a margin of 32-to-33 percent.
"Oracle continues to be a margin expansion story and we expect that trend to continue this quarter," CIBC World Markets analyst Melissa Eisenstat said in a recent research note. "We expect the increased operating leverage to come in the form of lower sales and marketing expenses."
Oracle's stock closed Thursday down 88 cents at $27.50 It rose 38 cents to $27.88 in after-hours trading. 
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