Investors Dubious of Oracle Takeover Spree

By MICHAEL LIEDTKE

SAN FRANCISCO – After pouring nearly $20 billion into a recent takeover spree, Oracle Corp. is having trouble convincing investors the money has been well spent.

Oracle’s stock remained in a funk even after the company reported its biggest quarterly profit increase since embarking on its high-priced expansion more than a year ago.

In a report released after the stock market closed Monday, the Redwood Shores-based company said it earned $765 million, or 14 cents per share, for the three months ending in February. That compared with net income of $540 million, or 10 cents per share, at the same time last year.

Revenue for Oracle’s third quarter totaled $3.47 billion, an 18 percent increase from $2.95 billion a year ago. If the value of the dollar hadn’t increased substantially over the past year, Oracle estimated its revenue would have climbed 22 percent.

After subtracting acquisition costs and other charges unrelated to its ongoing operations, Oracle said it earned 19 cents per share. That figure was penny above the average estimate of analysts surveyed by Thomson Financial.

Oracle’s management reiterated its previous earnings guidance for the current quarter ending in May – traditionally the period when the company posts its biggest profit.

Excluding acquisition costs, the average analyst estimate for the fourth quarter stands at 27 cents per share, according to Thomson Financial.

Oracle’s shares climbed 12 cents to close Monday at $13.72 on the Nasdaq Stock Market, then dropped 53 cents, or 4 percent, in extended trading.

The past quarter represented Oracle’s most robust earnings growth since it devoured longtime rival PeopleSoft Inc. in an $11.1 billion acquisition completed in January 2005.

Since then, Oracle has taken over Siebel Systems Inc., Retek Inc. and several other small software makers, raising the total price of its recent buying binge to nearly $20 billion.

Oracle mounted the aggressive expansion to bolster its stock price and pose a stiffer challenge to Germany-based SAP AG, the longtime leader in business applications software – the computer coding that automates a wide range of administrative tasks.

The strategy hasn’t panned out yet as Oracle’s market value has remained largely unchanged since it began spending all that money. SAP, meanwhile, says it is picking more sales from corporate customers worried about how Oracle’s wave of takeovers might affect the quality of future products.

SAP ended 2005 with a 21 percent share of the business applications software market followed by Oracle at 10 percent, according to AMR Research.

Safra Catz, Oracle’s co-president and chief financial officer, said the latest quarter showed the company is getting stronger.

"We don’t feel like we are losing customers at all," she said in a Monday conference call with reporters. "Our renewal rates remain extremely high. If anyone is taking (market share), I would say it is us."

Oracle’s sales of new software licenses totaled $1.1 billion in the quarter, a 16 percent increase from a year ago. New licenses are viewed as a good way to gauge a software maker’s health because those sales produce a lucrative stream of service and support revenue in future years.

Sales of business applications software, particularly on SAP’s home turf in Europe, accounted for a large chunk of Oracle’s growth in the last quarter.

Oracle’s business applications totaled $269 million, a 77 percent increase from $152 million a year ago. The growth rate was unusually high, largely because Oracle only owned PeopleSoft for two-thirds of last year’s quarter and its sales of PeopleSoft products right after the takeover were unusually weak, totaling about $30 million.

If not for a slight lift from the Siebel acquisition in February, Oracle’s business applications licenses would have been $247 million in the fourth quarter.

By another measure used by some industry analysts, Oracle’s business applications growth isn’t as impressive the year-over-year increase makes it appear. While they were still rivals, Oracle and PeopleSoft combined to sell $270 million in business applications software during the comparable period two years ago.

Oracle’s sales of database software – the company’s foundation – didn’t generate as much growth as some analysts had hoped. The company licensed $827 million in database software during quarter, up by just 4 percent last year. Catz blamed the lackluster growth largely on currency exchange rates that worked against the company.