Monday, September 17, 2012

Oracle: Earnings Preview

Oracle Corp. (ORCL) is set to release its first quarter 2012 results on Sept 20, 2011, after the closing bell. In the run up to the earnings results, we do not notice any substantial movement in analysts’ estimates for the quarter.

Looking Back at 4Q11

Oracle reported robust top-line growth in the fourth quarter of 2011 that helped the company earn 71 cents per share in the quarter, which beat the Zacks Consensus Estimate by two cents.

Total revenue in the fourth quarter increased 12.2% year over year to $10.81 billion, driven by better-than-expected new software license revenues (up 19.2% year over year), fully offsetting a decline in hardware sales (down 4.0% year over year). The decline in hardware sales were primarily attributed to Oracle’s policy of selling Sun products at a profit, thereby cutting down on volume.

Expectations in 1Q12

For the first quarter of 2012, Oracle expects non-GAAP earnings in the range of 45 cents to 48 cents per share. The first quarter 2012 earnings guidance is significantly higher than year-ago quarter's 39 cents, as well as the Zacks Consensus Estimate of 44 cents.

Total revenue growth on a non-GAAP basis is expected to be in the $8.27 billion to $8.50 billion range. The Zacks Consensus Estimate for the first quarter 2012 is projected at $8.34 billion.

New software license revenue growth is expected to grow in the 10.0% to 20.0% range. Hardware product revenue growth is expected to range between (5.0%) and 5.0% for the first quarter.

Estimates Trend Revision

For the quarter, none of the 15 analysts covering the stock revised their estimates in the last thirty days. However, for fiscal 2012, out of the 16 analysts covering the stock, 6 analysts lowered estimates, resulting in the Zacks Consensus Estimate dropping two cents to $2.31.

Analysts expect Oracle to report another strong quarter on the back of strengthening demand for both its hardware and software businesses.

Moreover, Oracle’s industry-specific application strategy, engineered systems (Exadata, Exalogic) strategy, combined with the upcoming release of Fusion, will likely help Oracle gain a larger market share than its rivals, namely International Business Machines Corp. (IBM), Hewlett-Packard Co. (HPQ), and SAP AG (SAP).

Our Take

Oracle Corp. has consistently exceeded estimates over the preceding four quarters. The average surprise in the preceding four quarters is a positive 9.28%, and another positive earnings surprise is expected from the company.

Oracle will continue to report strong results based on its innovative product pipeline, improving margins, high recurring revenues, growth in hardware sales and increasing adoption of cloud computing over the long term.

We believe Oracle will benefit from its positioning with Sun hardware and Oracle software. The fact that both the Sun hardware and Oracle software enjoy a relatively higher-margin domain is an added bonus, indicating sustained profitability improvement in the ensuing quarters.

In another case, Oracle and Google Inc. (GOOG) have agreed to attend a settlement discussion over the copyright- and patent-infringement lawsuit filed by Oracle last year.

As per the order of the U.S magistrate, both the companies will be represented by their respective Chief Operating Officers (CEO). The settlement meeting is scheduled on September 19, 2011 and will be mediated by the U.S. Magistrate Judge.

We believe an amicable settlement between the two giants will benefit both the companies going forward. We expect Oracle to settle for a licensing fee, while the settlement will ensure Google’s uninterrupted growth of the Android operating system over the long term.

Moreover, Oracle has provided a robust storage outlook based on the integration of its storage products with its entire software portfolio to deliver strong performance in a mixed storage environment. Oracle showcased a number of products targeting enterprise customers. The products include Exadata Storage, ZFS Storage Appliance, Pillar Axiom storage and StorageTek Tape.

We believe that the increasing adoption of cloud technologies is an essential facet of Oracle’s growth story over the long term. Oracle is aiming to provide the required infrastructure for companies to move toward cloud computing, where data is handled remotely in datacenters rather than on premises.

We maintain an Outperform rating (6-12 months) over the long term. Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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