Earnings Scorecard: Oracle - Analyst Blog

Software giant Oracle Corp. (ORCL) reported better-than-expected second quarter 2011 results with both earnings and revenues easily beating the Zacks Consensus Estimates. The results were driven by strong new software license sales (sales to new customers) and growth in hardware sales, boosted by the acquisition of Sun Microsystems.

Third quarter 2011 outlook was also above the Zacks Consensus Estimate, leading to a substantial rise in analysts' estimates for the third quarter and full years 2011 and 2012.

Detailed below is the recent earnings announcement, subsequent analysts' estimate revisions and the Zacks Rank as well as the long-term recommendation for the stock.

Second Quarter Earnings Highlight

Total revenue, growth in new licensing revenues and earnings per share (EPS) were encouraging and remained well above management's expectations.

Earnings (excluding one-time items but including stock-based compensation expenses) of 49 cents per share shot up 32.4% from 37 cents in the year-ago period, and surpassed the Zacks Consensus Estimate of 44 cents. The rise in earnings was attributable to higher revenues from new software license sales, which grew for the fifth consecutive quarter.

Second quarter total revenue increased 47.0% year over year to $8.58 billion, driven by better-than-expected new software license revenues. Non-GAAP revenues leaped 47.3% year over year to $8.65 billion. Revenues were also above the Zacks Consensus Estimate of $8.30 billion.

New software license revenues (23.1% of total revenue and 35.3% of total software revenue), shot up 20.9% to $2.00 billion and were better than the company's expectation. Revenues from hardware systems products were $1.11 billion, in line with the company's expectation.

Agreement of Estimate Revisions

Clearly, a positive sentiment is palpable among the analysts, who remain optimistic about Oracle's performance. Given impressive results and a robust guidance, the Zacks Consensus Estimates have been upward bound with the analysts increasing their estimates in the last 30 days.

In the last 30 days, 13 out of 15 analysts providing estimates raised their estimates for third quarter 2011. For fiscal 2011 and 2012, 15 analysts and 14 analysts, respectively, have raised their estimates in the last 30 days. There was no downward estimate revision, which points to the fact that analysts remain extremely bullish on the stock.

Magnitude of Estimate Revisions

Management provided a robust third quarter guidance. Total revenue growth on a non-GAAP basis is expected to range from 31% to 35% at current exchange rate and 30% to 34% in constant currency. New software license revenue growth is expected to range from 10% to 20% at current exchange rate and 9% to 19% in constant currency.

For the third quarter, Oracle expects non-GAAP EPS in constant currency to range between 48 cents and 50 cents. Assuming the current exchange, EPS is expected to range between 48 cents and 50 cents. This is up from 38 cents reported in the comparable quarter last year.

In the last 30 days, the Zacks Consensus Estimate for third quarter 2011 increased by 3 cents to 47 cents. For fiscal 2011, estimates rose by 10 cents to $2.00 and for fiscal 2012 the estimate increased 11 cents to $2.23.

Oracle a Zacks #2 Rank Stock

Oracle's results indicate increased business spending by corporations.  They also show that the demand for software is pacing up. With an increase in the number of upward estimate revisions, following the earnings release, we believe that the share price could go up. Oracle is currently rated as a Zacks #2 Rank (short-term Buy).

We also remain positive on Oracle's growing Exadata pipeline, despite intense competition from International Business Machines Corp. (IBM) and EMC Corp. (EMC). Management expects the Exadata pipeline to grow to $2 billion, up from the previous expectation of $1.5 billion. We believe this will speed up both sales growth and profitability in the Sun server and storage businesses.

With Sun, Oracle will likely emerge as the foremost player in the database software market, including high-end servers, and compete against Hewlett-Packard Company (HPQ), a behemoth in the industry.

Over the long term, we maintain our Neutral rating on the stock. 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.

 
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