Oracle Beats Estimates In Tough Economy

Despite a drop in net income and in sales of new software licenses, Oracle beat analysts' expectations for its third fiscal quarter ended Feb. 28 and reported an operating margin of 36%, the highest in its history.

Oracle's software license sales were $1.52 billion, down 6% from the third quarter of last year. However, Oracle is highly susceptible to currency fluctuations, since unlike many other software companies, its products are priced in U.S. dollars across the globe; the weakening foreign currencies in the past quarter hurt its results. If currency had remained constant with last year's third quarter, Oracle would have reported a 3% growth in software license revenue.

"We sold more new licenses in 3Q of this year than 3Q of last year, and that's in the face of a worldwide global recession," said CEO Larry Ellison in an investors' conference call on Wednesday.

And in a nod to cloud computing, Ellison also noted the company's "significant" CRM On Demand business and its next-generation Fusion applications, which will start shipping later this year and will be "cloud computing ready," he said. Ellison claimed Oracle is more focused on software as a service and cloud computing than its top competitor on the application side. "SAP is not making those investments," Ellison claimed.

Oracle co-president Charles Phillips said on the call that the company's "ongoing battle with Salesforce.com continues," noting that Oracle CRM On Demand replaced 1,000 seats in the quarter at Carlson Wagonlit travel.

But while cloud computing may be a sexy topic in the enterprise software business, Oracle's biggest breadwinner is its traditional software maintenance business. Maintenance revenues increased quarter-over-quarter from $2.62 billion to $2.92 billion, and made up 53% of Oracle's revenue, compared with 49% in last year's quarter.

That maintenance revenue is largely responsible for Oracle's strong operating margin, and is key to reaching its ultimate goal of a 50% operating margin, said co-president Safra Catz on the conference call. She called Oracle's overall results "spectacular."

Phillips acknowledged that application sales have been affected by the recession, and said Oracle is fulfilling existing demand for applications but not selling beyond that demand, since customers don't have the "headroom" for those purchases right now. By comparison, he said infrastructure sales (meaning middleware and databases) have been strong because businesses continue to spend on those things in a recession. Phillips also said average deal sizes were smaller during the quarter, but claimed Oracle is doing better than SAP in the recession because SAP relies on megadeals, and Oracle's diverse application portfolio lets it do many more smaller deals.

Total revenue was up 2% to $5.45 billion (11% in constant currency), while net income was down 1% to $1.33 billion (but up 14% with constant currency).

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