Software giant Oracle (Nasdaq:ORCL) reported first quarter results after the market close on September 20 that suggested it is making an easy transition from acquiring market share to earning it by growing its existing businesses. Strong capital generation and a reasonable valuation are helping it further stand out from the competition.
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First Quarter Recap
Reported revenues advanced 12% to $8.4 billion. Software revenue, including the sale of licenses, software updates and product support, jumped 17% to account for 66% of the total top line. Service revenue increased a more modest 10% to weigh in at 14% of sales. The only laggard during the quarter was hardware sales, which fell 1% and accounted for the rest of sales at 20%. This is a new product category and stems from the purchase of Sun Microsystems back in early 2010. The unit struggled because of a 5% decline in the sale of hardware system products. Hardware systems support revenue grew 4%.

Cost controls kept total expense growth to 2% and resulted in significant operating leverage, as evidenced by the 40% jump in operating income to $2.7 billion. This also represented an impressive operating margin of 32.1%. This flowed mostly to the bottom line as net income jumped 36% to $1.8 billion, or 22% of total sales for an equally impressive net margin. Earnings grew 33.3% to 36 cents diluted EPS as shares outstanding grew slightly.

Outlook
For the full year, analysts project sales growth of more than 8%, total sales of nearly $39 billion and earnings of $2.40 per share. This would represent year-over-year profit growth of more than 40%.

The Bottom Line
After a long string of acquisitions, Oracle appears to be shifting gears rather easily to internal or organic growth. Even more impressively, quarterly cash flow generation was strong as free cash flow came in at more than $1 diluted EPS. The company also ended the quarter with over $16 billion in net cash on its balance sheet, which works out to roughly $3.27 diluted EPS.

At a forward P/E below 11, Oracle's valuation is also appealing. Strong growth, impressive cash flow generation and a reasonable valuation make Oracle stand out from software rivals including SAP (NYSE:SAP) and Salesforce.com (Nasdaq:CRM), while a push into hardware will help it better compete with the likes of Dell (Nasdaq:DELL) and EMC (NYSE:EMC). (For additional reading, see A Primer On Investing In The Tech Industry.)

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