Oracle profit beats on 51 percent margins

You have to hand it to Larry Ellison -- he's a business genius. He recognized at the beginning of the decade that there was profit to be made in harvesting a huge shift -- from growth to maturity -- in the business of selling corporate software. Rather than wring his hands at the slowdown in corporate IT spending, Ellison recognized that growth would come from acquiring and consolidating the best of the corporate software providers.

That strategy is paying off now. Oracle just reported that, excluding some costs, it earned 46 cents a share in the period ended May 31: two cents more than analysts had expected. Although the numbers were down to $1.89 billion, or 38 cents a share, from last year's $2.04 billion, or 39 cents, revenue of $6.88 billion exceeded analysts' $6.47 billion estimate.

But the best part is that Ellison had promised to hit an operating margin of 50 percent, and Oracle delivered 51 percent. Oracle has spent $30 billion to complete more than 50 acquisitions since 2005, and Ellison has been good about cutting the overlapping costs from those acquired companies, and teaching his exceptionally able and aggressive sales force to sell all the new products that Oracle takes on through these acquisitions.

Moreover, Oracle reaps enormous fees from support. For every dollar Oracle got in 2008 business-application orders, it took in $2 in support fees. In databases and middleware, maintenance contracts yielded 60 percent of Oracle's revenue.

And Oracle's future looks solid. It predicted first quarter profit between 29 cents and 31 cents a share -- analysts forecast 30 cents for the period, which ends in August. Oracle expects sales (excluding those from Sun Microsystems which it announced it would buy in April) to fall 5 percent from a year earlier, holding currency rates constant -- about the $5.15 billion that analysts project.

What Ellison has done is a textbook case in how to win in a maturing industry. Oracle stock is up 3 percent in after-hours trading.

Peter Cohan is president ofPeter S. Cohan & Associates. He alsoteaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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