Oracle trial a dark cloud on results

Lisa Baertlein

SAN FRANCISCO: Technology bellwether Oracle Corp. is expected to post solid earnings growth that points to continued improvement in corporate spending, but analysts said the database company's legal battle with antitrust regulators threatens to steal the limelight.

"It seems probable that the drama of the courtroom may overwhelm the more mundane fact of Oracle's strong database performance," Bernstein analyst Charles Di Bona wrote in a research note, referring to Oracle's core business.

While most analysts agree that database sales will drive its fiscal fourth-quarter earnings and revenue higher than year-earlier levels, they are split over whether sales of Oracle's applications for automating corporate functions like accounting, purchasing and human resources will be up or down.

That applications business, which accounts for about one-fourth of Oracle's overall revenue, is at the center of the U.S. government's effort to block Oracle's $7.7 billion hostile takeover bid for rival PeopleSoft Inc., which has roundly rejected Oracle's numerous approaches.

Lawyers for Oracle, who dispute regulators' claim that its proposed marriage with PeopleSoft would crimp competition and result in higher prices, came out punching in opening arguments last week.

"They had a stronger start than people expected," said JMP Securities analyst Patrick Walravens, who has been monitoring the trial.

Shares of PeopleSoft and Oracle moved up during the first week of the trial, suggesting that some investors are more confident that a merger could eventually be cleared.

But Walravens noted that it is still early in the game. "I'm not trying to say that the outcome has been determined. We don't know what the judge is going to decide."

Walravens said that the future of the software industry -- in particular its ability to consolidate -- is at stake in the Oracle trial.

The proceedings, which kicked off June 7, already have resulted in a number of bombshell revelations -- including Microsoft Corp.'s disclosure that it explored a merger with Germany's SAP AG, the world's No. 1 provider of applications to large corporations.

GROWTH, BUT HOW BROAD?

Analysts polled by Reuters Estimates see Oracle delivering quarterly earnings of 17 cents to 19 cents a share, compared with 16 cents a year earlier.

They also are targeting revenue of $3.01 billion to $3.15 billion, compared with $2.83 billion in the year-ago period.

"We expect the quarter to be driven by good year-over-year growth from the database business," Merrill Lynch analyst Jason Maynard said in a note published on Monday.

Maynard said he sees Oracle's applications revenue rising 6 percent from a year ago to about $260 million.

Bernstein's Di Bona expects applications license revenue of around $220 million, a decline of just over 10 percent from a year ago.

Analysts said that SAP, PeopleSoft and Oracle -- the top three applications players -- face intense pricing pressure in a market where buyers hold most of the power.

"We believe that Oracle's applications franchise will continue to suffer as the weakness in the overall applications market persists and as the pricing environment has been further damaged by the ongoing PeopleSoft-Oracle tussle," Di Bona said.

Maynard emphasized that Oracle has recently lost key applications deals to SAP and small provider AMS at the same time as Microsoft's Navision is beginning to show up as a rival in the small business market.

"In the coming quarters, we expect Oracle's applications growth to come at the expense of PeopleSoft (and merger partner J.D. Edwards), particularly in the upper segment of the medium-sized market," Maynard said.

PeopleSoft has argued that Oracle launched its takeover in a bid to inflict financial harm on its smaller rival. Oracle contends that the business software market has multiple players and is ripe for consolidation.

© Reuters