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Oracle Q2 Preview: The Bar Is Set Low Amid Easier Comparisons

 December 14, 2012 10:08 AM

(By Mani) Business software maker Oracle Corp. (NASDAQ: ORCL) is expected to report 13 percent growth in earnings on 2.5 percent sales growth when it reports its second quarter financial results on Dec.18.

Wall Street expects earnings of 61 cents a share, according to analysts polled by Thomson Reuters. The high end of the estimate is at 63 cents a share with the low end being 59 cents a share. In the second quarter of last year, the company earned 54 cents a share.

Oracle's earnings have gone past Street view twice in the past four quarters, and there has been no change to the consensus view during the past 90 days.

[Related -Fusion-IO, Inc. (FIO): Can Fusion-IO Q2 Results Cheer Street?]

Quarterly sales, on average, are estimated at $9.03 billion, with high and low end estimates at $9.32 billion and $8.84 billion, respectively. In the year-ago period, Oracle generated revenue of $8.81 billion.

"We believe the bar is set low for Oracle and year/year comparisons are easier this quarter, so an in-line quarter should be enough to move the shares higher, given an attractive current risk/reward valuation profile," Oppenheimer analyst Brian Schwartz said in a note to clients.

However, odds are decreasing for a normalized IT budget flush in calendar fourth quarter, and Oracle's top-line trend could be suppressed because of macro headwind as well as slower revenue recognition from selling more software-as-a-service (SaaS) products.

"We are more optimistic about Oracle's earnings resiliency owing to the scale of its business, sound financial management, and ongoing customer traction selling higher margin engineered systems," Schwartz noted.

[Related -Teradata Corporation (NYSE:TDC): Lower Cost Platforms Could Curtail Growth Rates]

Oracle has decent large deal momentum selling its proprietary embedded Java technology for the newest smart devices/grids/systems and replacing older technology built on C++.

"We are less optimistic regarding the hardware business trends because of stiff pricing pressures and declining server shipments," the analyst said.

Nevertheless, Oracle is betting big on its cloud-based products and a "holistic" approach to the cloud could bring the business software maker to the top of the market.

Oracle has its Cloud vision, which is to provide a complete suite of enterprise-grade applications accompanied by a comprehensive platform for developers on a consistent enterprise service layer for development flexibility. Customers will be given a deployment choice as they can run in the Oracle public cloud, as a private cloud behind the firewall, or can buy traditional licenses and run on their own hardware.

It also highlighted the additions to the sales force, its more specialized sales model, and the building pipeline. More specifically, the company added 2,500 sales hires in fiscal 2011, and 3,300 sales hires in fiscal 2012, the bulk of which should be maturing over the next several quarters and be at full quota.

"We expect, building on the success of Exadata, more engineered system introductions over time, as seen with the recent Exalytics," Schwartz added.

For the first quarter ended August 31, 2012, Redwood City, California-based Oracle earned $2.0 billion or 41 cents a share, up from $1.8 billion or 36 cents a share for the year-ago quarter. Excluding items, it earned 53 cents a share, in line with Street. However, total revenue fell 2 percent to $8.18 billion, and adjusted revenue for the quarter also fell 2 percent to $8.21 billion. Analysts had a consensus revenue estimate of $8.42 billion for the first quarter.

Oracle shares trade 13x to its calendar 2012 consensus earnings estimate, below the S&P 500 group average multiple of 14x and SAP at 21x.

"Oracle has traded historically at a slight premium to the market, but we think it is currently trading at a discounted multiple because its growth rate is slowing, fundamentals are somewhat challenging, and investor sentiment is low, in our opinion," Schwartz said.

However, Oracle should benefit from organically driven new product cycles, which would help the company better monetize on its large installed base in 2013/2014. In addition, improved utilization from salesforce reorganization, positive demand trends for engineered systems and better market reputation and pricing advantage for the SaaS-based Fusion applications bodes well for Oracle.



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