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Oracle Profit Rises On Software Revenue

Some analysts attribute the positive quarter to Oracle's ability to retain many of the customers picked up through its two-year buying spree.
Oracle Corp. on Thursday delivered on a promise to post higher profits, pushed up by new software license sales and the ability to hang onto customers during a two-year acquisition spree.

Total revenue in the fourth quarter, end May 31, rose 25 percent to $4.85 billion, as sales of the company's enterprise management and database software posted gains. Revenue from new licenses rose 32 percent to $2.1 billion. Software revenue grew 28 percent to nearly $4 billion.

Net income for the quarter rose 27 percent to $1.3 billion, or 24 cents per share, companies with from $1 billion, or 20 cents per share, in the prior year. The results were largely in line with estimates the Redwood Shores, Calif.-based company issued last week.

"The number of actual deals greater than $1 million grew 39 percent, a clear indication the quarter was strong across the board," said Safra Catz, Oracle president and chief financial officer, during a call with investors. "We continue to take market share across all our product lines, growing apps faster than SAP, middleware faster than BEA, and databases faster than IBM."

Analysts say Oracle has begun to settle into the more than 20 acquisitions it made since January 2005, including $10.6 billion for PeopleSoft. They also attribute the positive quarter to Oracle's ability to retain many of the customers picked up through the two-year spree.

"Oracle's customer retention is good and they've grown maintenance revenue through the PeopleSoft, Siebel and Retek acquisitions," said Paul Hamerman, vice president of enterprise applications at Forrester Research Inc. "Nearly half their total revenue comes from maintenance. Those margins are very profitable."

AMR Research Inc. vice president of research Jim Shepherd said Oracle has gained a foothold in industries, such as retail and banking, where they previously lacked a presence. The acquisitions of PeopleSoft, JD Edwards, Seibel and Retek have also helped to secure a tighter foothold in higher education, healthcare and telecommunications, where they previously lagged rival SAP AG.

Through those acquisitions, Oracle also gained talent in applications development and experts in sales and marketing. Oracle President Charles Phillips said the sales force is more confident and now know how to deal with multiple products.

"Oracle placed a bet they could acquire and retain a customer base, and for the most part they have done a good job," Shepherd said. "They were always a big software company with a powerful brand and global coverage, but now they're a much bigger applications company, about twice the size."

Still in question, however, remains Oracle's future applications strategy. Analysts say it continues to evolve as the model moves to a service oriented architecture (SOA) platform. Oracle has done well building the middleware layer that enable new applications suite, but delivering the complete package remain roughly two years away.

That makes customers uneasy. They wonder if they'll have to undertake expensive migrations or stay with the current applications for as long as they are supported, Hamerman said.

The notion of an SOA enterprise resource planning platform is a "construct created by vendors rather something the marketplace demands," Shepherd said. "There's no indication customers are lining up chomping at the bit to migrate to Fusion, Oracle's next set of ERP applications."