Earnings Preview: Oracle - Analyst Blog

Oracle Corp. (ORCL) is expected to report its second quarter fiscal 2011 earnings on December 16, 2010, after market close.

The stock has been trending upward, following the release of the strong quarterly results in September. Oracle's shares are currently trading near their 52-week high price.

Recently, a federal jury in California ordered SAP AG (SAP) to pay $1.3 billion, one of the highest amounts ever paid in software piracy, to Oracle as a compensation for copyright infringement. In addition, Oracle wants SAP to pay about $211.6 million in prejudgment interest. This win represents a significant win for Oracle, thereby further driving its share price.

Second-Quarter Outlook

Management's second quarter 2011 guidance, provided during the first quarter earnings call, is in line with the Zacks Consensus Estimate and the Wall Street forecast.

For the second quarter, Oracle expects non-GAAP EPS in constant currency to be in the range of 45 cents to 47 cents. Assuming current exchange, EPS is expected to range from 44 cents to 46 cents. This is up from 39 cents reported in the year-ago quarter.

EPS is slightly above the Zacks Consensus Estimate of 43 cents. Management pointed out that the pipeline for both the software and hardware remains strong.

Oracle expects 3% negative currency effect on license growth rates and 4% negative effect on total revenue growth. Total revenue on a non-GAAP basis is expected to range between 39% and 43% in the second quarter at current exchange rates and 43% to 47% in constant currency. The guidance assumes a non-GAAP tax rate of 28.5%.

New software license revenue growth is expected to range from 6% to 16% at current exchange rates and 9% to 19% in constant currency. Excluding Hardware support revenues, Hardware product revenues are expected to be $1.0 billion to $1.1 billion in constant currency or $1.1 billion to $1.2 billion at current exchange rates.

Management plans to spend $4 billion for research and development in fiscal 2011, which will likely boost the company's product offerings.

Estimates Up

The Zacks Consensus Estimate of 43 cents for the fiscal second quarter is same in the last 30 days. The Consensus Estimate for fiscal year 2011 is $1.91 per share.

In the last 30 days, 2 of 17 analysts have made an upward revision to their second quarter 2011 estimates while 3 analysts have raised their estimates for the full year 2011. There were no downward estimate revisions.

With a few analysts raising their estimates for the full year 2011, this is unlikely to have a major impact on the Zacks rank. There is a strong agreement among analysts that results are likely to be in line.

First-Quarter Highlights

Oracle's first quarter 2011 results easily outpaced the Zacks Consensus Estimate and were well above management's expectation, given the strength in new software license (sales to new customers).

Earnings (excluding one-time items but including stock based compensation expenses) of 39 cents per share were up 34.5% from the year-ago quarter's 29 cents, and 4 cents per share above the Zacks Consensus Estimate of 35 cents.

First quarter total sales were up 48.4% year over year at $7.50 billion, due to better-than-expected new software license revenues. Excluding revenues related to assumed support contracts, which will not be recognized for fiscal 2011 due to certain accounting rules, non-GAAP revenues leaped 49.9% year over year to $7.59 billion. Revenues were above the Zacks Consensus Estimate of $7.29 billion.

Our Take

Despite foreign exchange headwinds, we expect Oracle to post strong year-over-year earnings growth on the back of an increased demand for software as seen from the company's growing revenues generated by new software license sales, which were up in the past four consecutive quarters. Further, Oracle is expected to benefit from the increase in IT corporate spending.

We remain positive on Oracle's long-term growth prospects, given its growing hardware business and expect 2011 results to be strongly aided by the Sun acquisition but also remain cautious near term, given the expected integration related issues.

With Sun, Oracle will likely emerge as the foremost player in the database software market, including high-end servers (ahead of International Business Machines (IBM), its primary competitor).

We maintain our long-term Neutral rating at this time since these positives have already been priced into the shares, leaving little room for above-market gains.

The limited number of estimate revisions points to the fact that there are no major catalysts that could drive results. However, we are positive on the company's longer-term growth prospects based on its growing market share, new product pipeline, incremental cost savings, robust cash flow, improved margin and high recurring revenues.
 
Oracle is currently rated as a Zacks #3 Rank (short-term Hold).

 
INTL BUS MACH (IBM): Free Stock Analysis Report
 
ORACLE CORP (ORCL): Free Stock Analysis Report
 
SAP AG ADR (SAP): Free Stock Analysis Report
 
Zacks Investment Research