Oracle Earnings Soar as It Adds PeopleSoft, Retek Assets

By John Pallatto  |  Posted 2005-03-22

Oracle Earnings Soar as It Adds PeopleSoft, Retek Assets

Counting the first two months of income generating from its newly acquired PeopleSoft assets, Oracle on Tuesday reported that third-quarter revenue and earnings soared as it reported hefty increases in sales of its core database technology.

Based on these results, Oracle Corp. officials raised their estimate for fiscal year 2005 earning per share from 62 cents per share to a maximum of 65 cents per share. These results are not based on GAAP (Generally Accepted Accounting Practices) that fully account for the cost of stock options and related expenses.

Revenue for the quarter increased by 23 percent to $3.09 billion, while net income totaled $814 million, a 25 percent increase over the same quarter a year ago, according to Oracle co-president Safra Catz.

Oracle officials made it clear that compared with Oracles sales and revenue, its $656 million merger deal with retail software producer Retek Inc., reached Monday night, was small potatoes.

"It is important to know that while Retek is an important strategic asset for Oracle—especially for our retail strategy—it is dwarfed by the size of our company," Oracle co-president Charles Phillips said. The acquisition will be accretive to Oracles cash flow "but is so small it doesnt have a material impact on our earnings in the future," Phillips said.

Oracles tender offer for Retek is scheduled to expire April 5, and it expects to take control of the company the next day, assuming that it acquires a majority of the shares, Phillips said.

Oracle already has an integration team in place that is "moving forward with the work to ensure a smooth transition with customers, employees and partners," Phillips said.

Retek customers likely will fare far better under Oracle ownership than they would have if SAP AG had succeeded with its final offer of $11 per share, said Paula Rosenblum, director of retail research at Boston-based Aberdeen Group Inc.

Retail industry customers would have faced too much uncertainty about the upgrade path under an SAP regime because most Retek customers ran the retail applications on the Oracle database or with Oracle applications, Rosenblum said.

There was already a great deal of overlap between SAPs existing retail applications and Retek applications, offering the likelihood that Reteks 200 corporate customers would have faced a "rip and replace" upgrade cycle to a unified SAP application suite, she said.

Next Page: Ellison says SAPs offer for Retek forced Oracles hand.

Forcing Oracles Hand

In a highly competitive industry that often operates on razor-thin profit margins, retail customers are highly averse to costly and complicated technology upgrades, she said.

"SAP is better off with out Retek," Rosenblum said, because it can probably achieve more by acquiring a more compatible retail software company or by extending its retail application suite through in-house development, she said.

Oracle CEO Larry Ellison noted that the company wasnt thinking about acquiring Retek after spending more than $10 billion to acquire PeopleSoft. However, SAPs $8.50 offer for Retek forced Oracles hand, he said.

To read more about the bidding competition for Retek, click here.

"We really expected to take a rest after PeopleSoft," he said. "The timing on Retek was not determined by us. SAP announced a purchase of Retek, and we thought the retail industry was strategic for us and we had to respond," he said.

While Oracle officials indicated that there will be no additional corporate acquisitions this quarter, Catz said the company will "remain opportunistic" about future acquisitions when attractive deals appear. Oracle typically does at least a few small corporate acquisitions "every quarter generally—at different times," she said.

Catz also confirmed why former Oracle CFO (chief financial officer) Harry You resigned from the company after only eight months on the job. You "got an offer he couldnt refuse" when technology integrator and consulting company BearingPoint Inc. hired him as its CEO.

Click here to read Evan Schumans commentary on what a Retek buyout means for the retail industry.

You is a veteran of technology consultant Accenture LLC, and BearingPoint needed to hire a new CEO to address its own "urgent financial issues," Catz said. Oracle is preparing to launch a search for a new CFO, and in the meantime, it has a "deep and stable bench" in its financial group, Catz said, adding that former CFO Jeff Henley remains with the company as its chairman.

Ellison also answered persistent questions about whether Oracle is actually losing market share in its core database market. He cited recent database market research by International Data Corp. contending that Oracle is gaining market share on the high end from IBMs DB2 mainframe relational database.

Over the past year, "our market-leading position has gone up from a little over 40 percent of the global database market to a little over 41 percent" of the market based on the IDC research, Ellison said. IBMs share has declined from 31.8 percent to 30.6 percent during the same period, Ellison said.

He contended that Oracle will continue to gain market share at IBMs expense as corporate customers shift from IBM mainframes to large Unix servers and Oracle database grids.

On the low end, Ellison said only two database companies are expanding their market share: Oracle and Microsoft. But he said Oracle is in a better position to expand its market share on the low end because Microsofts database products run on Windows while Oracles products run on Linux and Windows, along with a number of other operating systems.

Ellison said he expects that Oracle will gain market share as corporate users shift from using Windows to running Linux on servers.

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