Strong momentum in its enterprise applications business and tight-fisted control of expenses combined to boost Oracle Corp.'s third-quarter net income by 42% compared to the company's earnings for the same period last year.
In the quarter ended Feb. 28, Oracle reported, net income grew to $765 million as total revenues increased 18% to $3.5 billion.
While Oracle's core database software business continued its recent slow-growth performance trend, the company's applications business showed strength for the second consecutive quarter. Oracle's total applications software revenue for the quarter, $877 million, was up 74% over the same period last year.
While much of that increase can be attributed to non-organic growth -- the addition of PeopleSoft, JD Edwards, and other companies acquired in the past year -- sales of Oracle's homegrown applications also rose. In comments to securities analysts following the release of Oracle's financial results, President and Chief Financial Officer Safra Katz said revenues from internally developed applications such as Oracle's E-Business Suite were up 31% during the quarter.
At that rate, Katz said, Oracle's applications business is overtaking arch rival SAP and contributing to Oracle's overall goal of gaining share in its key markets.
"Our middleware is growing faster than BEA. Our apps are growing faster than SAP, and we are taking database market share from DB2," Katz said.
Oracle's new license revenue from applications grew 77% to $269 million compared to the year-earlier quarter. Revenue from application software license upgrades and support rose 73.2% during the third quarter.
Growth of Oracle's applications business was particularly strong in Europe during the third quarter. New license revenue from applications in the Europe, Middle East, and Africa region for the quarter was up 118% compared to the year-earlier quarter and increased 28% compared to the second quarter of 2006. Oracle co-President Charles Phillips attributed the strong results in part to the completion of a restructuring in Europe where some sales employees were assigned to specialize in the applications products.
Application license revenues were also strong in Oracle's Americas region, where they were up 62% compared to the year-earlier period.
The solid third-quarter results for Oracle's applications business was the second consecutive strong quarter for that business. In the second quarter of 2006, revenue from Oracle's applications grew 87.2% compared to the year-earlier period and 15.4% compared to the first quarter of 2006.
There's no reason to expect that Oracle's applications business won't continue to gain momentum, analysts said. The fiscal fourth quarter is often a strong period for Oracle's applications business, noted Ray Wang, a senior analyst at Forrester Research. Oracle can be expected to adjust sales incentives in order to produce a big fourth quarter for applications sales growth, Wang predicted.
Asked by analysts if Oracle expects to achieve sustained applications license revenue growth at least in the 10%-to-15% range, Oracle's Katz said, "We intend to do better than that."
Oracle's middleware products also produced strong third-quarter results. Phillips reported that sales from middleware -- including products such as the company's application server, master data management, and business process management software -- were up 22% during the quarter.
Oracle's database sales, however, continued to lag. The company reported that software revenues from database and middleware products grew only 5% in the third quarter to $1.9 billion. New software license revenue from databases and middleware grew 4%.
Those results continue a trend. Last quarter, Oracle reported a 2% growth in database and middleware license sales.
Still, Oracle CEO Larry Ellison continues to insist that the company does not believe single-digit revenue growth is becoming the norm in the database business. Oracle, he said, expects database sales growth rates to return to the low double-digit range with the assistance of new innovations such as Oracle's recently announced Secure Enterprise Search product.
Oracle's impressive third-quarter net earnings growth was assisted by moderating operating expenses. While Oracle's revenues grew 18% during the quarter, its total operating expenses were up only 11%. Katz said Oracle expects to continue to reduce operating expenses, particularly as it digests acquisitions such as Siebel Systems.