Earnings Preview: Oracle Corp.

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

The stock has been trending upward, following the release of the strong quarterly results in June. Moreover, the share price soared over the last two weeks on the news that the former CEO of Hewlett Packard Company (HPQ), Mr. Mark Hurd joined Oracle as the co-president after being forced to resign as a result of a sexual harassment allegation brought against him. Hurd’s appointment uplifted the share price by approximately 14.6%, following the announcement.

First-Quarter Estimates

Management had provided guidance for the first quarter of 2011 at the time of its last quarterly release. Oracle expects non-GAAP earnings per share in constant currency to range between 36 cents to 38 cents. This is up from 30 cents in the year-ago quarter. Management pointed out that the pipeline for both the software and hardware remains strong.

The Zacks Consensus Estimate for the fiscal first quarter is up by a penny to 35 cents, over the last 30 days. This is below management’s expectation. The Consensus Estimate for fiscal year 2011 has held up at $1.83 over the last month.

Total revenue on a non-GAAP basis was guided to rise between 41% and 45% in the first quarter at the current exchange rates and by 44% to 48% in constant currency, which was less than the 49% expected by analysts. Oracle expects 2% negative currency effect on license growth rates and 3% negative effect on total revenue growth.

New software license revenue growth is estimated to range from 4% to 14% at current exchange rates and 2% to 12% in constant currency, implying a range of $1.05 billion to $1.15 billion. Excluding Hardware support revenues, Hardware product revenues are expected to be approximately $1 billion.

Management expects Sun’s acquisition to be accretive to its earnings by at least 15 cents per share on a non-GAAP basis in 2011. Oracle expects Sun to meet or exceed the company’s targets for fiscal 2011 and 2012. The acquired business will contribute over $1.5 billion to Oracle’s non-GAAP operating profit in 2011, increasing to over $2 billion in 2012. Revenues from Sun Microsystems are expected to be $9.6 billion in 2011.

Agreement of Analyst

The overall trend in estimate revisions has been neutral with no change in the analysts’ estimates for the first quarter of fiscal 2011, over the last 30 days. Although one analyst raised the estimate for the full year 2011, this is unlikely to have a major impact on the Zacks rank. There were no downward estimate revisions. We believe that no movement in estimates represents strong agreement among analysts that results are likely to be in line.

Fourth-Quarter Highlights

Oracle’s fourth-quarter fiscal 2010 earnings of 58 cents per share were up 31.8% from the year-ago quarter and 11.5% above the Zacks Consensus Estimate of 52 cents. The growth in new licensing revenues (sales to new customers) and earnings per share was very encouraging and remained well above management’s expectation.

Earnings benefited from strong new software license sales, and growth in hardware sales was driven by the recent acquisition of Sun Microsystems. Oracle’s better-than-expected results were also aided by the improving IT spending environment.

Fourth quarter total sales were up 38.5% year over year at $9.51 billion, attributable to better-than-expected new software license revenues. Excluding revenues related to assumed support contracts, non-GAAP revenues leaped 40% year over year to $9.63 billion.

Oracle acquired Sun Microsystems in January this year. The fourth quarter results included a full-quarter contribution from Sun. Oracle’s results reflect the growing importance of its hardware business (acquired from Sun), which generated 19% of total revenue.

What to expect from the quarter?

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 three consecutive quarters. Oracle’s results would also indicate the extent of business spending picking up.

Oracle could also provide its new strategies regarding Sun’s acquisition and provide details on upcoming acquisitions, particularly in the hardware space. We would also look out for management’s guidance for 2011.

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 pri mary competitor). Oracle also competes against Teradata Corp. (TDC), Netezza Corp. (NZ) and SAP AG (SAP), among others.

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

According to market research firm IDC, Sun’s worldwide server market share has dropped below 9.0%. We would maintain a word of caution until there is more clarity on the revenues generated from Sun in the current quarter and in fiscal 2011.

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 #2 Rank (BUY).

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