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Another Case for OracleSoft

When I bought shares of Oracle (Nasdaq: ORCL  ) last week, my thesis was that the company would continue growing its cash flows substantially, boosting enterprise value and, therefore, per-share value by at least 40% over the next three years. And I thought there was ample evidence Oracle's cash flows would get even richer with an acquisition of business software maker PeopleSoft (Nasdaq: PSFT  ) .

What I didn't know is just how much the database king needs PeopleSoft.

In reporting first-quarter fiscal 2005 earnings yesterday, Oracle said new applications sales were down to $69 million from $107 million during the same period a year ago. Executives explained the shortfall by saying a number of deals expected to close would now be completed in the second quarter.

But that poor showing couldn't put a damper on an otherwise strong performance. Revenue rose 7% from last year to $2.22 billion, and net income climbed 16% to $509 million. Structural free cash flow once again was higher than net income, rising 24% to $528 million.

The good news for Oracle is that the results make the most compelling argument yet for an "OracleSoft" combination. PeopleSoft has seen its net income deteriorate in recent quarters, and Oracle's applications business clearly needs the boost.

Moreover, with cash flows growing as they are, Oracle can easily afford the $7.7 billion price tag it's proposing for PeopleSoft. Yet even with a decisive court victory over the Justice Department, Oracle still has several hurdles to clear before it can close a deal for PeopleSoft, including possible opposition from the European Commission, as well as two civil trials.

The wrangling is worth it, however. All indications are that Oracle would do better as OracleSoft. And that's saying something, for like Motley Fool Stock Advisor pick Dell (Nasdaq: DELL  ) , Oracle seems to get financially stronger with each quarter. Indeed, management said it is comfortable with guidance that pegs next quarter's sales at $2.58 billion to $2.66 billion, an increase of at least 3% over last year's $2.498 billion in second-quarter revenue. Net income is also expected to be up at least a penny from last year.

No wonder Oracle shares are up nearly 7% today. For a tech market in which earnings disappointments from heavies such as Intel (Nasdaq: INTC  ) have become common, Oracle's prediction of continued strength feels a little like an oasis in the desert.

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Fool contributor Tim Beyers owns shares of Oracle. You can view his Fool profile here.

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