Oracle Profit Rises 35% on Software Demand, Support

Oracle Profit Rises 35% on Software Demand, Support (Update2)

By Rochelle Garner

Dec. 19 (Bloomberg) -- Oracle Corp., the world's largest maker of database software, reported second-quarter sales and profit that beat analysts' estimates, bolstered by orders for new programs and revenue from customer-support contracts.

Net income rose 35 percent to $1.3 billion, or 25 cents a share, from $967 million, or 18 cents, a year earlier, Redwood City, California-based Oracle said today in a statement. Revenue gained 28 percent to $5.31 billion in the period ended Nov. 30.

Sales advanced more than 20 percent for the seventh straight quarter after Chief Executive Officer Larry Ellison spent $25 billion buying rivals and companies in new markets over three years. Oracle, which competes with SAP AG and International Business Machines Corp., boosted earnings through customer-support sales, its most-profitable business.

``A solid result in a challenging environment has to give investors a reason to cheer,'' Morgan Stanley analyst Peter Kuper said in an interview from Boston. He rates the shares overweight and said he doesn't own them. ``Oracle even beat our expectations for top-line revenue growth.''

Sales that include maintenance fees from acquired companies were $5.36 billion, beating the $5.03 billion average estimate of analysts in a Bloomberg survey. Excluding stock-based compensation costs, profit was 31 cents a share, compared with the 27-cent estimate of analysts.

Oracle gained 85 cents, or 4 percent, to $21.61 in extended trading. The shares fell 49 cents to $20.76 at 4 p.m. New York time in Nasdaq Stock Market trading. The stock has advanced 21 percent this year.

New Licenses

Sales of new licenses, the key indicator of future growth among software companies, gained 38 percent to $1.67 billion. In September, Oracle forecast that sales of new licenses would rise as much as 25 percent, to $1.51 billion.

Oracle sells database products, so-called middleware software that helps different types of programs share information, and business-management applications for handling such tasks as accounting, merchandising and logistics.

The company used its $10.3 billion purchase of PeopleSoft Inc. in January 2005 to become the second-biggest maker of business applications, after SAP in Walldorf, Germany. Since then, Oracle has bought 35 more companies, primarily to add business-management applications.

``This acquisition strategy has not only worked but it's driving more revenue,'' said Brendan Barnicle, a Pacific Crest Securities analyst in Portland, Oregon. ``They are taking some share.''

Database Revenue

Sales of new database licenses, which include databases and middleware-server software, rose 29 percent to $1.12 billion. Application license sales advanced 63 percent to $553 million, Oracle said.

Customers buying new programs must also sign maintenance contracts, the only way they can receive software updates that fix bugs and add features. The agreements increase in price every year, said Sarah Friar, a Goldman, Sachs & Co. analyst in San Francisco.

Revenue from maintenance contracts gained 24 percent to $2.49 billion in the quarter, Oracle said.

Last quarter, the company failed in its $6.7 billion hostile bid for BEA Systems Inc. Buying BEA would help Oracle challenge Armonk, New York-based IBM for the lead in the middleware market.

Companies selling middleware and databases are more profitable than companies that only offer applications, Heather Bellini, an analyst with UBS AG in New York, said in an interview. She advises investors to buy Oracle shares and said she doesn't own them. ``Oracle's acquisitions help them sell more databases and middleware,'' she said.

BLOOMBERG