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Oracle Corporation Q3 Earnings Preview: What To Watch

 March 15, 2013 12:16 PM

(By Mani) Oracle Corporation (NASDAQ: ORCL) is expected to report higher profit when it announces its third-quarter financial results on March 20.

Based in Redwood City, California, Oracle is one of the world's largest and most profitable business-software companies. It is a leading provider of database, middleware, business applications software, and engineered software/hardware systems that are used by enterprises and public organizations of all sizes around the world.

Wall Street expects Oracle, a Nasdaq 100 component, to earn 66 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies 6.5 percent growth from last year, when it earned 62 cents a share. The company sees earnings of 64 to 68 cents a share.

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Oracle's earnings have managed to top Street expectations thrice in the preceding four quarters, with upside surprise ranging from 4.9 percent to 10.7 percent. The consensus estimate remained unchanged at 73 cents a share in the past 90 days.

Quarterly revenues are projected to rise 3.6 percent to $9.38 billion from $9.06 billion a year-ago. Oracle forecasts sales growth of 1 to 5 percent. The company has recorded average sales growth of 2.25 percent in the last four quarters.

Investors will look at the legacy hardware segment, which has been struggling as Oracle continues to transition away from select low-margin product lines sold by Sun before the merger. Hardware revenues have either missed or come in near the low-end of guidance range in 8 out of the last 9 quarters.

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

Hardware systems revenues for the second quarter dropped 16 percent to $1.3 billion, with hardware systems products revenue down 23 percent and hardware systems support revenue down 6 percent.

However, overall data software spending may be recovering, and enterprise demand for faster pre-engineered data systems or appliances such as Exadata could be stronger than expected. In December, Oracle posted surprisingly strong results, its database business outgrew its middleware and application segments, and Oracle flagged a big planned sales expansion in Business Intelligence and analytics.

"We estimate hardware revs of $773M (up from $734M in FQ2). The -11% y/y growth is below the guidance range -10% to 0% y/y. We expect hardware y/y growth to turn positive in F4Q13 at +1% (but full year is at -14% for FY13 after -13% in FY12)," UBS analyst Brent Thill wrote in a note to clients.

New software license sales and cloud subscriptions are also a closely watched metrics as it helps illustrate how Oracle is performing in the rapidly growing Cloud market. Oracle made a strategic mistake by being late to the cloud, and its home-grown Fusion cloud application suite has any real customer traction outside of the assets that have been recently acquired namely RightNow and Taleo.

The company's recent cloud-related deals such as Eloqua, which closed on Feb 8 and had quarterly revenues of about $25 million, will be incremental. Further, it recently agreed to acquire cloud management start-up Nimbula.

Nimbula Director, Nimbula's flagship product is a software service that helps enterprises and service providers to build private, public or hybrid clouds. It allows enterprises to offer Amazon EC2-like services to their internal users and allows service providers to build their own public cloud offerings.

"We model software license + Cloud subs growth for FQ3 (Feb.) Of +8% y/y, at the mid-point of guidance range +3% to +13%. Sequential growth of 6.8% q/q is slightly above historical seasonality of +4.1% in last 5 years and +5.4% since 1996," Thill noted.

For the second quarter, Oracle reported net income of $2.6 billion or 53 cents a share, compared to $2.2 billion or 36 cents a share for the year-ago quarter. Excluding items, it earned $3.1 billion or 64 cents a share.

Total revenue for the second quarter rose 3 percent to $9.09 billion. Oracle's total software revenues increased 10 percent to $6.6 billion. New software licenses and cloud software subscriptions revenues advanced 17 percent to $2.4 billion.

Since reporting its second quarter results on Dec.18 the stock has gained 10 percent and 21 percent in the last one year. The stock has been trading 13 times its fiscal 2013 consensus earnings estimate. These multiple appear attractive relative to Oracle's mega-cap technology peers in light of the potential for Oracle's organic growth profile to improve, the rising margins, and the durability of its core database business.

While commoditization and price deflation have knocked on the door of almost every large technology vendor, Oracle's database, middleware, and application businesses have largely avoided these pressures.

"These advantages matter as portfolio managers consider rotating more funds out of mega-cap technology peers (think HP and Cisco) that suffer from these pressures. Oracle shares are also trading near a historically high P/E multiple discount to rival SAP," BMO Capital Markets analyst Karl Keirstead said in a client note.

Out of 44 analysts covering the stock, 31 have a rating of "buy" or strong buy," while 13 recommend "hold." There are no "sell" ratings on the stock, which has trading between $25.33 and $36.33 during the past 52-weeks.

"All things considered, we conclude that Oracle shares are likely to experience more P/E multiple expansion throughout 2013 than we previously thought," Keirstead said.



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