Looking for growth? Consult Oracle

4/21/2008



Oracle ($20; NASDAQ: ORCL) worried investors when it reported that businesses were slowing purchases of software applications in the February quarter. Customers began delaying orders in February.

The company says most of the deals scheduled for February were signed by early March. Still, investors got spooked and sold shares, and the stock fell 7% on the earnings report. Oracle has since regained about half of the ground it lost, though the stock may be range-bound until it can show that application-license sales picked up in the May quarter.

Per-share earnings rose at least 16% in each of the last four fiscal years, and consensus estimates project 26% growth in the fiscal year ending May. Oracle looks cheap relative to its growth rate, trading at 14 times expected year-ahead earnings, versus an average of 16 for other systems-software makers. Oracle is a Buy and a Long-Term Buy.

Trend or fluke?
Revenue from application licenses grew just 7% in the February quarter, versus a 57% increase in the year-earlier period and consensus expectations for 32% growth. Without help from acquisitions and favorable exchange rates, application-license revenue probably would have declined for the quarter.

While the applications results inflamed fears of a pullback in U.S. technology spending, the rest of the business performed well. Database and middleware license sales rose 20% in the February quarter, and overall company revenue increased more than 20% for the third consecutive quarter. Database sales have been accelerating over the last two years and are now growing at a rate above 20%.

Oracle’s customers tend to spend consistently on such infrastructure technology as databases. As a result, the database business has historically held up better than applications during economic slowdowns. And Oracle depends heavily on revenue from infrastructure software, with just 11% of sales coming from applications. Outside of the financial-services and homebuilding sectors, spending on technology has remained strong.

The slowdown in application spending forced Oracle to decrease its sales-growth target by 5% for the May quarter. But because of widening profit margins, Oracle raised its per-share-profit guidance for the quarter. The company now expects revenue growth of 14% to 18% and per-share earnings of $0.43 to $0.44 (up 16% to 19%).

A good deal
In recent years, Oracle has become more dependent on acquisitions for growth, a strategy that so far has been successful. The $8.5 billion purchase of BEA Systems ($19; NASDAQ: BEAS), slated to close by the end of May, should increase Oracle’s presence in middleware, the software that connects computer systems and applications. The deal should boost per-share profits in the first year.

Oracle generates more than half of its sales (56% in fiscal 2007) outside the U.S. That geographic diversity, coupled with a customer mix that spans many industries, will likely blunt the effects of a U.S. recession. In addition, maintenance revenue should remain relatively steady regardless of the state of the economy. An annual report is available from 500 Oracle Parkway, Redwood City, CA, 94065; www.oracle.com.


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