Earnings Scorecard: Oracle

The largest database and enterprise software company after Microsoft Corp. (MSFT), Oracle Corp. (ORCL) reported first quarter 2011 earnings and revenues on September 16, outpacing the Zacks Consensus Estimates. The impressive results were attributable to strong new software license (sales to new customers) sales and growth in hardware sales, boosted by the acquisition of Sun Microsystems in January this year. The results indicate an increased business spending by corporations.

Total revenue was above the high end of the company’s guided range. Moreover, the growth in new licensing revenues and earnings per share (EPS) was encouraging and remained well above management’s expectation.

Earnings of 39 cents, excluding one-time items but including stock based compensation expenses, were more than the Zacks Consensus Estimate of 35 cents, posting a surprise of 11.4% in its first quarter fiscal 2011.

First quarter total sales were up 48.4% year over year at $7.50 billion, attributable to better-than-expected new software license revenues that upped 25%. Excluding revenues related to assumed support contracts, non-GAAP revenues leaped 49.9% year over year to $7.59 billion. Revenues were above the Zacks Consensus Estimate of $7.29 billion.

Investors were optimistic on the company’s results, which uplifted the share price to more than 4% in after-market trading, following the earnings release. The recent trend in the Zacks Consensus Estimates revision clearly indicates the analysts’ positive sentiment about the stock.

Second Quarter Outlook

Management’s second quarter 2011 guidance was above the Zacks Consensus Estimate and also surpassed the Wall Street forecast. Assuming current exchange, EPS is expected to range from 44 cents to 46 cents. This is up from 39 cents reported last year and above the Zacks Consensus Estimate of 43 cents. Management pointed out that the pipeline for both the software and hardware remains strong.

Total revenue on a non-GAAP basis is expected to range between 39% and 43% in the second quarter. New software license revenue growth is expected to range from 6% to 16%. Hardware product revenues are expected to be $1.0 billion to $1.1 billion. Oracle expects 3% negative currency effect on license growth rates and 4% negative effect on total revenue growth.

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

Agreement of Analysts

Out of the 35 analysts following Oracle, in the last 30 days, 6 analysts revised their estimates upward for the second quarter of 2011. 4 analysts revised their estimates upward for the third quarter, whereas just 1 analyst revised the estimate downward for the same period. For fiscal 2011, in the last 30 days, 15 analysts have revised their estimates upward and 13 analysts have also increased their estimates for fiscal 2012. There was no downward estimate revision for fiscal years 2011 and 2012, indicating that the analysts remain bullish on the stock.

The current Zacks Consensus EPS estimate of 43 cents for the second quarter of fiscal 2011 indicates a 16.2% increase year over year. Similarly, for fiscal 2011, the current Zacks Consensus EPS estimate of $1.90 indicates a 19.5% increase year over year.

We believe the positive momentum for estimate revision mainly comes from strong second quarter guidance, reflecting an increased demand for software, particularly evident from the company’s growing revenues generated by new software license sales, which were up in the past four consecutive quarters. Oracle could also benefit from the pick-up in business spending.

Oracle is also expected to benefit from the rise in worldwide enterprise software revenues, which are projected to surpass $232.0 billion in calendar year 2010, a 4.5% increase from 2009, according to research firm Gartner. The research firm predicts that the enterprise software market will continue to grow in 2011, with revenues reaching $246.6 billion. It estimates that the enterprise software market will reach $297.0 billion through 2014, a five-year CAGR of 6%. According to Gartner, Oracle held the no. 1 position in the overall database market with a 48.0% market share, followed by International Business Machines Corp. (IBM – Analyst Report), Microsoft and Teradata Corp. (TDC – Analyst Report).

With the addition of Sun Microsystems’s servers, storage, SPARC processors, the Solaris operating system, Java and the MySQL database to Oracle’s portfolio of database, middleware and business applications, Oracle will be well positioned to grow in the database market with the combined benefits of both the software and hardware infrastructure.

Magnitude of Estimate Revisions

In accordance with the positive estimate revision trend, the Zacks Consensus EPS Estimate has also moved up by 7 cents and 5 cents, respectively, for fiscal 2011 and fiscal 2012, in the last 30 days.

Our Recommendation

Oracle’s acquisition of Sun Microsystems will provide an impetus for growth in fiscal 2011 and beyond with increased accretive synergies strengthening its competitive position. If successful, Oracle’s new strategies would lead to higher top- and bottom-line growth, with increased traction from the combined product portfolio.

We are positive on Oracle’s longer-term growth prospects, given its growing market share, new product pipeline, cost savings initiatives and robust free cash flow and expect 2011 results to be strongly aided by the Sun acquisition. Despite the positive Consensus sentiments, we remain cautious near term, given the expected integration related issues and slower-than-expected IT spending.

Although we remain incrementally positive on the stock, we maintain our long-term Neutral rating at this time since positives have already been priced into the shares, leaving little room for above-market gains. Currently, it carries a short-term Zacks #2 Rank (Buy), given the analysts’ positive estimate revision for the stock.

ORACLE CORP (ORCL): Free Stock Analysis Report

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