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On the surface, Oracle’s fourth quarter results (its fiscal year ended May 31) looked downright dismal. Sales fell 5.2% to $6.86 billion compared to the same period a year ago, and profits dropped 7.2% to $1.89 billion. The fourth quarter is traditionally one of the company’s strongest, and this was the largest earnings drop the Redwood Shores, Calif. company had seen in three years.
So, looking at the company’s shares today you might have expected to see investors heading for the exits. Instead, the company’s shares were up just over 9% at midday.
Stock markets in general were having a good day, but obviously something else is up. The bottom line is, as bad as the results were, investors were expecting them to be a lot worse. And analysts saw other things to like in the quarterly report.
For starters, Oracle, which does a significant portion of its business overseas, was severely impacted by currency fluctuations. If the impact of currencies were taken out of the results, Oracle said its earnings would have increased 9% in the quarter. Secondly, revenue from product license updates and maintenance fees rose 8% in the quarter, to $3.1 billion, giving the company a reliable cushion in the recession.
“Adjusted for the substantial movement in the US dollar exchange rate this fiscal year, which is beyond our control, we grew non-GAAP earnings per share by 19% for the year,” Oracle President Safra Catz said in a statement. “That’s an amazing achievement given what’s been happening in the global economy over the past twelve months.”
The importance of software maintenance and support fees also played out in profit margins. Catz said the company achieved its highest quarterly profit margin since the company went public.
The combination of the factors had some analysts issuing buy recommendations on Oracle. “We continue to favor Oracle as a relative outperformer during this downturn because of its large base of recurring maintenance revenues; business diversity (product set, end markets, and geographies); and earnings and cash flow stability,” David Hilal of Friedman Billings Ramsey wrote in a report.
The big question mark still hanging over Oracle, however, is the impact its acquisition of Sun Microsystems will have on future earnings. The company surprised the tech community with its $7.4 billion takeover in April, which is expected to close in the current quarter. Many analysts are wondering in particular, how its acquisition might upset relationships with traditional hardware partners, such as IBM, HP and Dell.
On a final note, Oracle President Charles Phillips couldn’t resist the opportunity to use the quarterly report to take a swipe at rival SAP. “We grew faster and took market share from SAP in every region around the world,” Phillips stated. “In Europe our applications business grew 5% in constant currency versus negative 27% growth for SAP in their most recent quarter. Historically, Europe has been an SAP stronghold, but these results prove that we can compete and beat them everywhere.”
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