Earnings Preview: Oracle

Zacks

Oracle Corp. (ORCL) is scheduled to announce its fiscal 2013 second quarter results after the closing bell on December 18, 2012. In the run up to the earnings release, we do not notice any significant revision in estimates by the analysts covering the stock.

Previous Quarter Highlights

Oracle reported a dismal first quarter wherein both the top and bottom line missed the Zacks Consensus Estimate. The top line declined 2.3% year over year as revenue from Hardware plummeted 19.5% year over year and services revenue dropped 5.6% year over year. However, the fall in total revenue was somewhat restricted by the growth in Software and Cloud revenue. Though the bottom line missed the consensus mark, yet it increased 8.9% year over year primarily due to lower operating expenses and margin expansions.

For the second quarter of 2013, Oracle expects non-GAAP earnings in the range of 59 cents to 63 cents per share, which is significantly higher than the year-ago level. Total revenue on a non-GAAP basis is expected to grow in the range of 0.0% to 4.0% (in $). New software license and cloud subscription revenue growth is expected to range from 5% to 15%. Hardware product revenue is expected to contract in the range of 18% to 8% in the reported quarter.

For further details please read: Oracle Misses 1Q Estimates

Estimate Revision Trend

Over the past 30 days, only 2 out of the 17 analysts covering the stock have revised their estimates down, while no upward revision was witnessed during the period. The Zacks Consensus Estimate for the second quarter remained at 58 cents, reflecting year-over-year earnings growth of 9.4%.

On the revenue front, the Zacks Consensus Estimate for the second quarter is pinned at $9.03 billion, 2.7% higher than the previous-year quarter.

Analysts covering the stock remain cautious due to the sluggish macroeconomic condition, which is expected to result in slower-than-expected IT spending scenario in the near term. Moreover, Oracle’s hardware segment has been witnessing contractions for the past few quarters. However, strong software sales and revenue from cloud applications are expected to offset the decline in hardware and services revenue.

Recommendation

Oracle’s start to fiscal 2013 has been quite lukewarm. However, we believe that the company’s strong product pipeline will drive broad-based top-line growth going forward. We believe that speedy adoption of engineered systems and cloud suites will drive incremental top-line growth. Oracle’s solid product suite lends a competitive edge over rivals like IBM Corp. (IBM) and SAP AG (SAP).

Nonetheless, lower hardware volumes remain a concern in the near term. As Oracle sells higher-margin products compared to its competitors, we anticipate that a sluggish market and lower IT spending may act as a headwind for the hardware volume going forward. Oracle may face integration issues due to the rapid pace of acquisitions within a short span of time.

We maintain a long-term Neutral recommendation on Oracle. Currently, Oracle has a Zacks #4 Rank (Sell).

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