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Oracle Shatters 1Q Estimates

Oracle easily hurdled even the most optimistic analysts' estimates in its first quarter, posting a profit of $840 million, or 16 cents a share, on sales of $4.53 billion.

More important to investors—and disturbing to competitors like SAP—was the 35 percent increase in new software license sales, which CFO Safra Catz called "the strongest growth of any quarter in 10 years." That figure includes new licenses for both its core database software applications and its rapidly expanding portfolio of business applications that compete with SAP, Microsoft and IBM.

Excluding stock-option expenses, Oracle reported Thursday it earned 22 cents a share on the quarter, easily topping the consensus estimate of 21 cents a share. The $4.53 billion in sales marked a stunning 26 percent improvement from the $3.59 billion it raked in during the year-ago quarter.

"We continue to take applications market share from SAP," Oracle President Charles Phillips said in the earnings release. "In Q1, Oracle's applications new license sales grew 65 percent compared to SAP's new license sales growth rate of 18 percent in their most recently completed quarter. We like our growth strategy of expanding into high-end, industry-specific vertical software as opposed to SAP's growth strategy of moving down market to sell software to small companies."

That Phillips went out of his way to take a swing at SAP isn't surprising. Determined to do whatever it takes to fend off Oracle's attack on its leadership position in the business-application market, SAP on Wednesday debuted its first software-as-a-service (SaaS)  offering, Business ByDesign, to mixed reviews.

While Oracle shares have rallied up more than 25 percent in the past year, SAP shares have lagged behind, appreciated roughly 9 percent over the same period.

SAP is betting that its on-demand service will capture enough new small- and mid-sized businesses (SMB) to keep it comfortably ahead of Oracle's apparent destruction-by-acquisition strategy.

To at least one analyst covering both companies, Larry Ellison has made the better bet.

"We believe investors continue to underestimate a critical component of the margin story," Peter Goldmacher, an analyst at Cowen & Co., wrote in a research note Friday, reiterating his "outperform" rating on Oracle shares.

"Selling into an existing customer carries a significantly lower cost of sales versus courting new customers. The company went to great lengths on the call to highlight that its enterprise installed base go-to-market strategy is more lucrative than SAP's down-market growth strategy."

On Thursday, Goldmacher stood pat with his "underperform" rating on SAP shares, saying that SAP's $500 million investment in Business ByDesign to target the SMB market was missing the point because "we have a hard time seeing how this product will drive material revenue growth or margin expansion."

Oracle shares moved up 86 cents, or 4 percent, to $21.91 in early-afternoon trading Friday.

Oracle told analysts to expect second-quarter earnings of between 20 cents and 21 cents a share, up from 18 cents a share in the year-ago quarter. It's now forecasting total sales of $4.95 billion to $5.04 billion in the second quarter, up roughly 18 percent from the $4.16 billion in sales recorded in the same period last year.