Oracle Corp beat Wall Street's earnings estimates as new software sales came in at the high end of the company's forecast, offsetting a sharp drop in hardware revenue. The software maker's stock rose 1.5% after the news, in sharp contrast to the sell-off three months ago when its second-quarter profit missed analysts' forecasts for the first time in a decade.
"The software business bounced back," Citigroup analyst Walter Pritchard said. "If you look at where the value is at Oracle, it would be the software business."
Oracle (Redwood, Calif., USA) estimated that new software sales this quarter will range from a 2% drop to growth of as much as 8%, translating into $3.6 billion to almost $4 billion. The midpoint of that forecast, of 3% growth, is a sharp drop from the 19% increase in the fourth quarter of last year.
Yet Oracle Chief Financial Officer Safra Catz suggested on a conference call that the outlook may not be so grim. She said she had been "somewhat conservative" in calculating that forecast.
Still, shares in the company pared half of the gains made earlier in the extended trading session. They had rallied 3% shortly after it posted earnings that beat Wall Street's lowered expectations.
Catz also estimated revenue from hardware, a persistent weak spot for the software firm, at $870 million to $980 million. Some analysts had expected hardware revenue of more than $1 billion as the company turns around the struggling division it got when it bought Sun Microsystems in 2010.
Oracle posted profit, excluding items, of 62 cents per share in its third quarter ended February 29, beating the average forecast of 56 cents of analysts surveyed by Thomson Reuters I/B/E/S. Software sales rose 7% from a year earlier to $2.4 billion, at the high end of Oracle's own forecast.
"It's a pretty significant turn," said Daniel Genter, president and chief investment officer of RNC Genter Capital Management. "The only weak spot was they're a little low on the hardware."
Oracle, the third largest software maker after Microsoft Corp (Redmond, Wash., USA) and IBM Corp (Armonk, NY., USA), had forecast that new software sales would climb between 0 to 10% from a year earlier when it last reported earnings on December 20.
Investors pay close attention to new software sales because they generate high-margins, long-term maintenance contracts and are an important gauge of Oracle's future profits.
To be sure, the 7% growth posted in the third quarter is lower than in previous periods, which does not bode well for future earnings, said Kim Forrest, an analyst with Fort Pitt Capital Group .
"In fiscal 2011 they were in the double digits, and now they are in the single digits. That's never a good trend," she said.
The company also reported on Tuesday that hardware product sales fell 16% to $869 million. It had forecast a decline of between 5 and 15%.
(Reporting By Jim Finkle; Additional reporting by Liana B. Baker, Nicola Leske, Noel Randewich; Editing by Richard Chang)