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Oracle Patient For Enterprise Software Pickup

Oracle may be waiting a little longer for the return of massive enterprise software spending especially for its Application Server business, so say analysts looking at the software giant's earnings report due tomorrow.

A consensus of analysts surveyed Tuesday by research firm Thomson First Call say Oracle should meet, or slightly beat its own cautious forecast. Oracle is expected to report a per-share profit of 8 cents on total revenue of $2.22 billion - down from 10 cents and $2.38 billion a year ago, and at the low end of the Redwood Shores, Calif.-based company's forecasts.

The slump in Oracle's numbers is accredited to its U.S. business bumping along the bottom, while it's European business continued to deteriorate, albeit a slower pace than previous quarters.

From his discussions with salesmen and channel partners, Deutsche Bank Securities application software analyst Tim Dolan believes that Oracle's database business will fare better than the apps business for the company, quite possibly because there has not been any dramatic change in the enterprise software market.

"The majority of large deals are still being broken down in size, discounting remains at very high levels, and sales cycles remain long and challenging," Dolan said in a briefing to investors. "But Oracle's tone and confidence, perhaps in 2003 numbers, will likely play out into software stocks for the end of the week."

Oracle has been fighting to gain a larger piece of the pie in the $1.2 billion application server market, which has it working furiously to fight IBM and BEA in the large enterprise market. However, the company's flagship Oracle9i application server is now competing in some new areas. Sun Microsystems' Sun One, which is now bundled for free in Sun's Solaris 9 operating system has been chipping away at Oracle 9i AS, as well as low-priced offerings from Hewlett-Packard and Microsoft for the mid-market.

Back in October, analysts with Deutsche Bank Securities predicted that Oracle's application software business was on the cusp of a major rebound.

The New York-based financial research firm said the slow forecast for application sales and a focus on application upgrades by customers (e.g., Oracle, PeopleSoft) rather than brand new product rollouts will likely keep a lid on high-end database growth for the next several quarters.

Oracle is now gearing up for its Oracle AppsWorld in San Diego next month, where it expects to offer specialized 11i upgrade activities, such as hands-on labs and a special pre-event 11i upgrade forum. The No. 2 software maker is also marketing its Oracle 9i AS tools to capture specific sectors such as Automotive, Life Sciences, Retail, Financial Services and Communications.

As it has seen its previously unquestioned dominance in its flagship database market is under siege, as Gartner Dataquest's annual survey of database licensing revenue for 2001 showed IBM topping Oracle for the first time. Oracle countered by partnering with Dell Computer to sell its app server. IBM answered by slashing prices on its DB2 database in November.

Oracle's database still drives 80 percent of it's license revenue and the if not all, of the company's profitability.

"While we have been encouraged to hear about improved quality on the 11i application front, we have still been somewhat disappointed in that it doesn't yet appear to be translating into many new customer wins," said Dolan. "We believe part of the reason for this is that it is hard to make a comeback in a challenging IT spending environment. Our estimate for new licenses of applications is $140 million quarter over quarter, which may be too aggressive given recent chatter that Oracle's improved product quality has not yet translated into market share gains."

Deutsche Bank says it may also take another couple of quarters before Oracle can finally shake its tainted image following the high profile problems with the 11i application suite.

"On the database side, we still believe Oracle is competing well in its sweet spot of the market, and it enjoys the highest level of customer loyalty among any of the major database providers," Dolan said.