Oracle to post profits via cost cuts

By Lisa Baertlein

PALO ALTO, California: Wall Street is expecting Oracle Corp. to at least hit profit targets when it posts fiscal first-quarter earnings next week, but many analysts think the world's second-biggest software company got there again with tight expense controls. "We believe Oracle's (first quarter of fiscal 2003) could ... show better than expected margins on continued cost cuts, while revenues could show some weakness in Europe, in particular," Merrill Lynch analyst Christopher Shilakes said in a client note.

Oracle is second only to global software giant Microsoft Corp. when it comes to holding down costs and delivering profits, analysts said. Citing sources, Shilakes said Oracle slashed its company-wide headcount by 600 to 700 during the quarter, which ended in August. Oracle closed its fiscal year 2002 in May with 42,006 employees, down from 42,927 the previous year.

"This suggests to us that the environment remains challenging and cost containment remains a focus for the company," Shilakes added. Oracle's year-over-year revenues have fallen in five of the last six quarters as corporate demand for technology remains lackluster. Quarterly profits, however, started declining only three quarters ago -- thanks to cost controls.

The Redwood Shores, California-based database software giant has forecast first-quarter net profits of 7 cents per share and warned investors that software license revenues could be down 15 percent to 25 percent from the year earlier, when it earned 9 cents per share on software sales of $711.1 million.

Analysts said the company set the bar low, in contrast to earlier quarters, when it was too aggressive and disappointed investors who had grown used to boom-era earnings growth. "I think they set it at a level they thought they could make," said Patrick Walravens, an analyst at JMP Securities in San Francisco.

Nearly three dozen analysts polled by tracking firm Thomson First Call expect Oracle to post earnings of 6 cents to 8 cents a share when it reports on Sept. 17.

Applications Turn-Around ?

Competition from IBM Corp. and Microsoft has forced Oracle to roll out a stripped-down, low-price version of its key database technology. Oracle executives say price-conscious customers have been choosing that cheaper "Standard" edition database over its more expensive "Enterprise" version, which further hampers database sales, which were bruised when big-spending Internet and telecommunications companies went bust.

Meanwhile, IBM bought database vendor Informix -- a move that Gartner Inc. unit Dataquest said helped it unseat Oracle as the world's No. 1 database seller, based on revenue. Oracle executives say they are not losing market share, measured by number of users. They also dispute IBM's numbers.

Sales of Oracle's 11i applications that manage day-to-day business activities such as accounting, purchasing and customer service have been shrinking. The company's first 11i release was buggy and Oracle still is battling to improve product perception, despite having mended the early glitches.

In July, the state of California canceled its $95 million, multi-agency deal with Oracle after months of political controversy over potential conflict of interest claims against senior aides to Gov. Gray Davis. Oracle officials say the company and the state have moved on -- but some analysts say the jury is still out.

Sanford C. Bernstein analyst Charles Di Bona recently cut his profit forecast for Oracle by 2 cents to 8 cents a share, due to concerns about the scrapped California deal and worries over 11i and application server sales, among other things.

Banc of America Securities analyst Bob Austrian, however, said his checks into Oracle's business point to growing 11i sales after several quarters of decline. "Industry checks suggest Oracle will meet easy August estimates and provide a modestly encouraging outlook -- particularly for improving applications results," Austrian said.

© Reuters