Zacks_Analysts' Blog : Earnings Preview: Oracle Corp. - Analyst Blog

Oracle Corp. (ORCL) is set to release its second quarter 2012 results on Dec 20, 2011, after the closing bell. In the run up to the earnings results, no substantial movement in analysts’ estimates for the quarter was noticed.

Prior Quarter Recap

Oracle reported modest first quarter 2012 results, with earnings of 46 cents per share beating the Zacks Consensus Estimate by two cents. Total revenue in the reported quarter increased 10.7% year over year to $8.40 billion. Total revenue was slightly above the Zacks Consensus Estimate of $8.34 billion.

The increase in earnings was attributable to higher new software license sales, which grew for the eighth consecutive quarter.

For the full report please read: Oracle Beats on Software Sales

The Quarter Ahead

For the current quarter, Oracle expects non-GAAP earnings in the range of 56 cents to 58 cents per share. Second quarter 2012 earnings guidance, which was provided at the time of the first quarter earnings results, was significantly higher than the year-ago level of 49 cents per share as well as the Zacks Consensus Estimate of 54 cents.

Non-GAAP total revenue growth is expected to range from 4.0% to 8.0%. New software license revenue growth is expected in the 6.0% to 16.0% range. Hardware product revenue growth is expected to be flat to down 5.0% in the second quarter. The Zacks Consensus Estimate projects revenues of $9.23 billion for the second quarter.

Estimates Trend Revision

For the quarter, only one out of the 17 analysts covering the stock lowered estimates in the last 30 days. Over the same period, no upward estimate revision was noticed. Therefore, the Zacks Consensus Estimate for the quarter stayed at 55 cents. Analysts’ estimates range from 54 cents to 58 cents.

Analysts covering the stock expect the company to meet expectations on the back of higher license revenues. However, unfavorable foreign exchange rates may act as a headwind. Additionally, the analysts are particularly concerned about the company’s hardware business that has witnessed declines in the previous few quarters. In all, analysts expect the company to perform modestly, as macro-economic concerns and weaker than expected IT spending keep its performance in check.  

Our Take

Oracle has exceeded estimates in the preceding four quarters. The average surprise for the period is a positive 6.99%, and we think the trend indicates another positive earnings surprise from the company.

We believe that Oracle has a strong product pipeline, which will drive broad-based top-line growth going forward. Moreover, strong adoption of Exadata, Exalogic, the core SPARC product line and fusion systems will drive incremental top-line growth going forward. We expect this strong product portfolio to provide Oracle a competitive edge over International Business Machines Corp. (IBM) and SAP AG (SAP) going forward.

Oracle is exiting the low-margin third-party hardware sales business, which will drive its margin going forward. The company remains focused on selling SUN products at high margins, which will drive operating profit going forward.

However, lower hardware volume will remain a concern in the near term. We believe Oracle will take at-least another three to four quarters to achieve top-line growth in the hardware segment. This is particularly due to the uncertain macro environment in both the Americas and EMEA.

Oracle is also expected to face strong competition from Hewlett Packard Co. (HPQ), IBM, VMware Inc. (VMW) and Red Hat Inc. (RHT) in the cloud computing market that may hurt its profitability over the long term.

We maintain a long-term (6–12 months) Neutral recommendation on Oracle shares. Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.