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Ellison’s buying spree gives Oracle a buffer

Ellison’s buying spree gives Oracle a buffer
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First Published: Thu, Mar 27 2008. 12 01 AM IST
Updated: Thu, Mar 27 2008. 12 01 AM IST
San Francisco: Larry Ellison, the Oracle Corp. chief executive officer who led the software maker on a $33.5 billion spending spree, did more than add 39 businesses and 20,000 customers. He bought armour against a US economic slump.
The company was expected to announce its results for the third quarter of 2007-08 early Thursday morning India time and say that sales grew by at least 20% for the eighth straight quarter, fuelled by a wider range of products and more customer-support contracts. Third-quarter sales rose an estimated 22% to $5.41 billion (Rs21,694 crore), according to the average projection of 20 analysts surveyed by Bloomberg. Oracle follows a June to May fiscal year and its third quarter ends in February.
Ellison’s acquisition strategy helped the third largest software maker take orders from rivals and withstand a slowdown in US technology spending. Oracle bought makers of software that analyses and secures data, gaining programs that are in greatest demand, according to a Goldman Sachs & Co. report on information-technology spending. “They definitely have the pieces people are interested in,” said Sarah Friar, a Goldman analyst in San Francisco. “They have a lot of new products that let them go to customers with something that will intrigue them.”
Excluding compensation and acquisition costs, Redwood City, California-based Oracle’s profit probably rose to 30 cents a share last quarter, from 24 cents a year earlier, according to analysts in the Bloomberg survey. The results are due after the market closes.
Oracle spokeswoman Deborah Hellinger didn’t return an email and phone call seeking comment for this story.
Undervalued shares?
Oracle rose 31 cents to $21.08 on Tuesday in Nasdaq Stock Market trading. The shares have dropped 6.6 % this year, compared with the Standard and Poor’s 500 Information Technology Index’s 13% decline. Of the 32 Oracle analysts tracked by Bloomberg, 26 recommend buying the shares, four advise holding them, and two say to sell.
“The company is significantly undervalued, and the shares should trade up noticeably to bring the price more in line to the intrinsic value,” Larry Coats, chief executive officer of Durham, North Carolina-based Oak Value Capital Management, said in an interview. Oak Value owned 610,550 Oracle shares as of 31 December, according to Bloomberg data.
Growth in US technology spending this year will slow to 5%, from 7% in 2007, according to a Goldman Sachs survey of 100 executives last month.
Economic slump
Record home foreclosures and the collapse of subprime lending have raised concerns that the US economy may slip into a recession. The uncertainty has prompted many businesses to curb spending plans, the Goldman survey found. Some kinds of software remain in demand, according to the report. Those include programs that analyse sales, share information, manage accounts and inventory, and secure data. Oracle acquired all of these products through acquisitions.
The worldwide market for corporate applications, Oracle’s strength, will outpace sales of other programs, according to a report this month from Gartner Inc. Sales of the software will grow 10% this year to $197.2 billion, the firm found.
“As companies try to make do with what they have, they are looking to make small purchases,” said Colleen Graham, an analyst at Stamford, Connecticut-based Gartner. “Oracle can make a lot of these incremental sales, and that makes it easier for Oracle to weather the current economic environment.”
Oracle also makes money on related software when it sells applications. A business application often requires additional database features and so-called middleware, programs that help different kinds of software communicate. “Oracle knows for each dollar they get from an application, they can get another two dollars in middleware or database sales,” Goldman’s Friar said. “Their salespeople know who you are and what you don’t have. They’re good at going to a customer for one product, and selling other things as well.”
Licence sales
In December, Oracle predicted that third quarter sales of new licences, the key indicator of future growth among software makers, would rise as much as 25% to $1.74 billion.
The firm is grabbing a bigger share of corporate software budgets than rivals Microsoft Corp. and International Business Machines Corp. (IBM), according to Goldman. Oracle ranks behind Microsoft and IBM in total software sales.
Fees from support contracts, which swell with each acquisition, also are boosting results. Every time an Oracle client buys a program, it also purchases maintenance contracts for updates, new features and bug fixes. The contracts renew each year, delivering a recurring revenue stream that’s bigger than new product sales.
In the first two quarters of fiscal 2008, Oracle reported $2.76 billion in licence sales and $4.99 billion in customer- support fees. Fees accounted for half of Oracle’s total revenue of $9.96 billion in thesame period.
Maintenance fees will continue to grow as Ellison, 63, acquires more companies and additional customers. “Oracle is showing it’s better to be bigger and more widespread across markets,” said David Rudow, an analyst with Minneapolis-based Thrivent Asset Management, which has 3.3 million Oracle shares. “Oracle’s consolidation of the software industry is really helping them.”
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First Published: Thu, Mar 27 2008. 12 01 AM IST
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