Oracle Corp.'s acquisition-driven enterprise applications strategy showed signs of regaining lost momentum in the three-month period ending November 30, helping to offset continuing disappointing results in the company's core database business.
For the company's second fiscal period of 2006, total revenue from Oracle's applications business -- reported on a non-GAAP basis -- was $1.3 billion, up 87.2% from the comparable period last year and up 15.4% compared with the previous quarter (While the year-earlier quarter does not include revenues from Oracle's acquisition of PeopleSoft early this year, the first quarter, 2006, does.)
The applications revenue figures were considerably improved over what Oracle reported in the first quarter of fiscal 2006, when total applications revenue fell 21% compared to the immediately-preceding quarter.
In the most recent quarter, revenue from new applications licenses grew a healthy 23.7% compared with the prior quarter and was up 109.4% from the year-earlier quarter.Revenue from applications software license updates and product support for the most recent quarter was essentially flat compared to the immediately prior three months.
"As we approach the one-year anniversary of the [PeopleSoft] merger, [applications] customers are renewing subscriptions and buying more," said Oracle President and CFO Safra Catz in remarks to security analysts.
"As we predicted, an overwhelming majority of PeopleSoft customers are renewing subscription services. In fact, PeopleSoft renewal rates are higher than when PeopleSoft was a standalone company," she noted.
Catz said subscription renewal rates are in the "95-percent plus" range. Oracle CEO Larry Ellison attributed the high renewal rates to strong PeopleSoft customer satisfaction, bolstered by Oracle's heavy post-acquisition investments in support and new product development.
The relatively strong applications results were "in line with what Oracle was saying they would do," said Judy Sweeney, a vice president at AMR Research Inc. in Boston. "By and large it wasn't any kind of stellar performance, but it was reasonable."
Sweeney said Oracle has a good chance to continue to gain momentum in the applications business, particularly as the company puts more sales and marketing effort behind the acquired PeopleSoft and JD Edwards.
The relatively strong applications performance somewhat offset continuing weakness in Oracle's core database software business. For the quarter, Oracle reported non-GAAP database and middleware revenues of $2.1 billion, up just 2% compared to the second quarter of last year.
Much of that weakness, Ellison said, was attributable to poor results in Oracle's European operations, where stagnant economies in Germany and France and a strengthening dollar held down revenues. For the quarter, Oracle's database revenues fell 7% in the company's Europe/Middle East/Africa region, while rising 14.7% in the Americas.
Oracle's applications revenues, meanwhile, grew 22.2% in the Americas compared to the year-earlier period, while applications revenue fell 7% in Europe.
Overall, Oracle reported that total revenues for the quarter grew to $3.3 billion, up 19.4% compared to the year-earlier period. Net income for the quarter fell 2.1% to $798 million.
Oracle's profitability was also inhibited by rising operating expenses. Overall for the quarter, operating expenses grew by 33.9% compared to the year-earlier period. The growth in expenses was led by higher research and development costs as Oracle threw money at initiatives such as Project Fusion, the company's effort to merge its various enterprise applications platforms.
Research and development expenses for the quarter grew by 46.3% compared to the year-earlier period.
Still, CEO Ellison said Oracle is on track to meet its goal -- laid out 19 months ago -- to grow earnings and earnings per share by 20% per year over the next five years.
To execute on that goal, however, Ellison made it clear that Oracle will need to continue to make strategic acquisitions as well as to continue organic growth. "We don't think we can get there ... for the full five-year plan without some strategic acquisitions," Ellison told analysts.
Oracle's latest acquisition, that of CRM market leader Siebel Systems Inc., is now expected to close early in calendar 2006, Catz said. The $5.85 billion deal last month received clearance from the U.S. Department of Justice, and is due for a first phase review by the European Union on December 23. Catz said Oracle hopes to clear that hurdle also so that the deal can be presented to Siebel shareholders for approval.
Going forward, Ellison said Oracle acquisitions will be designed to give the company leadership in a given market or a strong number-two standing with a chance to challenge for market leadership.
"The software business is very easy to understand," Ellison said. "Almost all the profits go to number one, and a little bit goes to number two."