Oracle's fiscal fourth-quarter results, released Tuesday, are a textbook example of why it wants PeopleSoft bad enough to take on the Justice Department in court: its applications business sucks. Other than that everything is jolly.
The sails of its flagship database business took wind from the economic rebound. Overall revenues were up 9% to $3.1 billion. It recorded its single best operating margins ever (45.7%), and thanks to judicious cost cutting, it reported a 15% year-over-year earnings increase to $990 million, or 19 cents a share, a penny higher than the Street thought because of lower taxes.
Basically it hit the midpoint of its guidance.
Okay, so Oracle's fourth quarter is always its best, but the thorn on the rose is definitely its applications business.
While Oracle's Q4 revenues from new databases licenses grew 15% to $1.08 billion, thanks to its RAC widgetry - (actually its core database business was only up 3%, but that's another story) - its applications revenues dropped 6.2% to $231 million.
Oracle consoled itself with the thought that the apps business is at least stable, if not predictable like databases. "We're winning more than we are losing," Oracle CFO Jeff Henley claimed on a conference call Tuesday. "So, I think it's more a reflection of the market than us."
Other than that, Oracle offered no explanation for the shortfall.
Prudential's Oracle watcher was less sanguine and said the results confirmed his theory that "Oracle will be challenged to grow revenues much above its core database market growth of 5%-6%." Prudential figures Oracle's stock will stagnate this summer since its fiscal Q1 is typically nothing to write home about. Thinking like this probably accounts for the immediate drop in Oracle's share price.
By the way, an anti-takeover white paper dramatically entitled "Hostage Taking" that PeopleSoft prepared for the Justice Department was released to the press this week and in it PeopleSoft claims Oracle's "sham" bid was intended to prevent PeopleSoft from overtaking Oracle as the number 2 applications vendor.
Anyway, in Q4 Oracle's new software license revenues, a key measure of its business, increased 11% to $1.31 billion while software license updates and support rose 13% to $1.21 billion. Overall, software revenues were up 12% to $2.52 billion.
However, service revenues fell 4% to $558 million. The company downplayed the decline, which included both consulting and education. It seems it was the smallest decline in the past 10 quarters, anyway it helped boost the operating margin so who's complaining.
For the full fiscal year 2004, net income rose 16% to $2.7 billion while EPS increased from 43 cents to 50 cents. Total revenues were up 7% to $10.2 billion.
"Clearly, 2004 was both a year of recovery in demand and market share improvement," Henley said.
Oracle said its fastest growth continued to be on Linux and it's the dominant database on Linux.
According to CEO Larry Ellison, Oracle's services business will continue to decline and higher-margin software sales are expected to account for an increasing percentage of its overall business.
The company ended the quarter with $8.6 billion in the bank, which it's husbanding in hopes of buying PeopleSoft - and its success so far in court has convinced people it's got a shot - but if its PeopleSoft bid fails, Oracle intends to make other "multibillion" acquisitions, Henley said.
Henley refused to say whether Oracle was eying BEA as a fallback.
Oracle's also got $1.5 billion in deferred revenue, up only an odd and unexplained $15 million sequentially.
Looking forward, Oracle expects business to improve moderately. In the current quarter, Henley forecast new software licenses would grow 5%-15% year-over-year - exactly the same thing it's said for the last two quarters, Prudential observed - and figured total revenues would increase 6%-9% over the $2.07 billion reported in 1Q03.
It expects EPS of nine cents. "I'm hopeful that we will have a decent Q1 and maybe we will do a little better than I said," Henley mused.
Oracle missed its Q1 guidance the last two years running, when license revenues declined first by 23%, then by 7%, Prudential recalled, so it's working off a relatively easy compare.
For all of fiscal ‘05, Oracle expects operating income to rise 10%-20% with an operating margin of 40% on revenues up 3% more or less.
Oracle's headcount was up 1% sequentially in Q4.
Oracle wrote off $11 million in PeopleSoft-related charges in Q4.
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