Oracle Corporation (NYSE:ORCL) Q2 Earnings Preview: What To Expect?

Oracle Corporation (NYSE:ORCL) will announce its second quarter fiscal year 2014 results on Dec. 18, after the close of the market. Oracle will host a conference call and live webcast at 2:00 p.m. Pacific Time to discuss the financial results.

Redwood City, California-based Oracle is one of the world’s largest business-software companies. It provides 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 the database software giant to earn 67 cents a share, according to analysts polled by Thomson Reuters. The consensus estimate implies an increase of 4.7 percent from 64 cents a share in the same quarter last year.

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For the second quarter, Oracle sees non-GAAP EPS between 65 and 70 cents in constant dollars, and 64 to 69 cents in reported dollars. GAAP EPS is expected to be 51 to 56 cents in constant dollars, and 50 to 55 cents in reported dollars. The company’s earnings have managed to beat Street view twice in the past four quarters. Over the past 90 consensus estimate has dropped by 2 cents from 69 cents.

Quarterly revenue is expected to grow 0.9 percent to $9.19 billion from $9.11 billion in the corresponding quarter a year-ago. In the past four quarters, Oracle’s average revenue growth came was 1 percent. For the second quarter, Oracle sees total revenue growth on both GAAP and non-GAAP basis to range from 1 to 4 percent in constant dollars and negative 1 to positive 2 percent in U.S. dollars.

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BMO Capital Markets analyst Joel Fishbein, Jr. expects to see slight revenue upside to the Street’s consensus and 2-3 cents in upside to the consensus EPS estimates.

Investors will examine software sales. In last year’s second quarter, new license in cloud revenue increased 18 percent in constant currency. So, this year comparison could be tough. The company expects new software license and cloud subscription revenue growth in the range from negative 4 to positive 6 percent in constant currency and negative 6 to positive 4 percent in reported dollars.

The Street should also 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’s range in most of the previous quarters.

Oracle sees second-quarter hardware product revenue ranging from negative 9 to positive 1 percent in constant dollars and negative 11 percent to negative 1 percent in reported dollars. Further, the mix of hardware and software is closely watched as it directly supports the margin profile.

Meanwhile, Oracle is facing a secular change in the industry, which is moving towards cloud-based systems from costlier infrastructure. Macro remains one of the biggest overhangs.

The Street would look for updates in cloud strategy and how the recent cloud-related deals such as Eloqua, Nimbula are contributing to the topline. With respect to cloud, Oracle had a strong first quarter. ORCL really started to hit stride, with great wins at A&A, LinkedIn, SIRIUS XM Radio, Telus, Barclays Bank. It also released its Sales Automation Release 7.

The market may want additional color on improvement in sales execution and favorable impact from the recent partnerships with Microsoft,, and NetSuite. Comments on attach rates and renewal rates should be watched while trends over software updates and product support are expected to continue to power earnings and cash flow.

Further, the demand for new products (especially 12c) is closely monitored, specifcally Oracle’s 12.1c version of its core database on an M-series Sun server with a full 32TB of DRAM. This database system will have enough in-memory capacity to handle unusually large workloads, potentially including the SAP ERP systems of many enterprises.

Investors may also focus on an announcement over shareholder returns. Oracle ended last quarter with approximately $39.1 billion in cash and short-term investments, or roughly $8.37 per share. Oracle repurchased 7 percent of its shares outstanding in fiscal 2013 ($11 billion in share repurchases) versus 4 percent in fiscal 2012 ($6 billion in share repurchases).

At the fiscal year-end quarter, Oracle announced an additional $12 billion under its existing share repurchase program in future quarters and announced a quarterly cash dividend of.12 cents a share of outstanding common stock, up 100 percent from previous quarterly dividend of 6 cents.

The 48 cents a share annual dividend at the current share price implies a 1.6 percent dividend yield, which is still below that of its peers, and one would not be surprised to see continued increases over time.

Last quarter (ended Aug. 31), Oracle repurchased 92.8 million shares for $2.968 billion or approximately $32 per share. The company ended the period with $11.1 billion remaining under its share repurchase program.

For the remainder of the year, Fishbein assumes the company will repurchase $7.5 billion of stock; however, given management’s recent propensity to return cash to shareholders both through buybacks and dividends, this could prove conservative.

The outlook for the third quarter should hold the key along with recovery in hardware product revenues in fiscal 2014. Some further margin improvement and an increase in buy-back activity should bring investor confidence back.

Since reporting its first quarter results on Sept.18, the stock has fell 2 percent and dropped 4 percent this year. The stock, which trades 10.4 times its forward earnings, has traded between $29.86 and $36.43 during the past 52-weeks.