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Oracle Sees Tougher Days Ahead

The spate of acquisitions, seven since June alone, that Oracle (NASDAQ: ORCL) has made over the years seems to be paying off.

During its earnings call for the first quarter of its fiscal year 2009 today, the database giant's executives bragged about its triumphs. Net income was up 28 percent to $1.1 billion and revenues were up 18 percent year-over-year to $5.3 billion for the quarter, which ended August 31.

The forward guidance was not so positive, although company co-President and Chief Financial Officer Safra Catz said the forecast "looks good." She warned of a three basis point drop on the Q2 growth rate due to currency fluctuations. If the dollar remains constant, total non-GAAP revenues will grow 12-15 percent YoY, otherwise, it will grow at nine percent.

Non-GAAP earnings per share will be 26 to 27 cents in the second quarter, Catz said, adding that the guidance assumes a 27 percent tax rate for that quarter versus 28.2 percent YoY "as a result of the mix of earnings between higher and lower tax jurisdictions."

While saying that the strength of currencies does not impact Oracle's pricing or competitive position "as we don't adjust prices daily," she forecast that new software license revenues will be up 5-15 percent YoY if the dollar remains constant, or just two to 12 percent if currency fluctuations are taken into consideration.

The large range is a concern because of the strength of Oracle's product and update support revenues. In the first quarter, these revenues were "bigger than the total annual software revenue for all the top five companies," Katz said.

Gartner analyst Kenneth Chin was concerned about the impact of foreign currencies and the wide range in revenue figures on Oracle's future revenues. "Foreign currency had a plus seven percent impact on earnings this quarter, and they see a minus three percent impact for the next quarter, which can be fairly significant," he told InternetNews.com. "There's nothing to say that, if the dollar moves more quickly and becomes stronger, that the negative impact wouldn't hit five percent or more."

He said the five to 15 percent forecast is "a huge range, and, if I was a financial analyst, I'd like to see a tighter range." The median figure would be 10 percent, which Chin described as "pretty ordinary" growth. "Will it make Wall Street happy if they come in at 10 percent?" he asked rhetorically.

That range, and Catz's forecast that the impact of foreign currency could see a growth range of two to 12 percent, "tells me Oracle's cautious in terms of where they see the market growing and the economic impact on them moving forward."

Oracle's application license revenue for Q1 was $331 million, 12 percent lower YoY, and Catz attributed that to the 65 percent growth in applications sales over the same period last year. "The first quarter is compared to a traditionally strong fourth quarter, so little changes mean a lot," she added.

The non-GAAP operating margin for this quarter was 40 percent, up 350 basis points YoY, and "our highest ever in Q1," Catz said. Oracle's license renewal business and software maintenance make up about half the vendor's business, and "that's an extremely high margin business and continues to grow in a very healthy fashion," CEO Larry Ellison said.

"The highest-margin portion of our business is also the largest portion business," Ellison added. He cited a Gartner report saying Oracle has 49 percent of the database business worldwide, which is 'larger than IBM (NYSE: IBM) plus Microsoft (NASDAQ: MSFT) plus Teradata (NYSE: TDC) plus Sybase (NYSE: SY)."

Ellison said Oracle's middleware business is its fastest growing segment, climbing 35 percent in the first quarter. "We think that has moved us from Number Two to Number One in middleware -- we've either passed or are about to pass IBM in the middleware business," he added.

Charles Phillips, Oracle's co-president, said the company will unveil more 11g updates to its database at OracleWorld, to be held in San Francisco Monday through Thursday. Since Oracle Database 11g was released in August 2007, "we've had 450,000 downloads, and have 200 ISVs," he added.

Gartner's Chin said Ellison's strategy of having a broad software product portfolio is paying off. "They acquired PeopleSoft, Seibel and BEA, and smaller companies to round out their product line, and the size and breadth of their product portfolio makes a big difference," he explained.