Oracle Corp. (ORCL) is expected to report its fiscal fourth quarter earnings on June 24, 2010. The stock has been weak following the release of the quarterly results in March, primarily reflecting its lower near-term earnings visibility and concerns about integration of the Sun acquisition.
Estimate Revisions
The overall trend in estimate revisions has been negative in the run up to the quarterly release, with more estimates lowered than raised. While the Zacks Consensus Estimate for the fiscal fourth quarter has held up at 52 cents, the estimate for fiscal year 2011 has come down over the last month from $1.84 to $1.81. In total, nine analysts have lowered their fiscal year 2011 estimates, while only two have raised them in the last 30 days.
Although analysts are positive overall on the Sun acquisition, which was completed in January this year, they remain cautious near term given expected integration related issues. They would prefer to remain on the sidelines until there is more clarity on the revenue generated from Sun in the upcoming quarter and in fiscal 2011. This is the main reason for the downward revisions.
Fourth-Quarter Guidance
Management had provided guidance for the coming quarter at the time of its last quarterly release. Total revenue on a non-GAAP basis was guided to rise between 36% and 41% in the fourth quarter at the current exchange rates and by 32% to 37% in constant currency.
Management expects a lower percentage of deals in the pipeline to close during the fourth quarter.
For earnings, management guided towards non-GAAP earnings in the range of 52 to 56 cents per share, up from 46 cents in the year-ago period. The fourth quarter 2010 earnings guidance includes the impact of the Sun acquisition. As per the Zacks Consensus Estimate, earnings for the upcoming quarter will come in at 52 cents, which is at the low end of the company’s guided range.
Management reiterated the previous contribution from Sun to Oracle’s business last quarter. The acquisition is expected to be accretive to its earnings by at least 15 cents per share on a non-GAAP basis in 2011. 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.
Oracle made it clear that it will no longer be selling products at a loss as Sun did, implying more profit on lower revenues.
Third-Quarter Results
Oracle reported third-quarter fiscal 2010 earnings of 36 cents, which was up 5.9% from the year-ago period but was in line with the Zacks Consensus Estimate. Earnings also came in line with the company’s guidance of 36 to 38 cents per share.
The boost in earnings was attributable to higher revenues from new software license sales. Revenues increased 17.5% year over year to $6.47 billion. Excluding the $596 million revenues from Sun, total revenue grew 7% in the quarter on a stand-alone basis. Total revenue on a stand-alone basis was above the high-end of the company’s guidance range.
Oracle’s results included a one-month contribution from Sun Microsystems, since the acquisition closed at the end of January 26, 2010.
Reiterate Neutral
We believe Oracle is well-positioned in the software market. We are positive on the company’s longer-term growth prospects, given its growing market share, new product pipeline, incremental cost savings, robust cash flow, improved margin, high recurring revenue base and international diversification.
Oracle’s acquisition of Sun Microsystems is expected to provide an impetus for growth in fiscal 2011 and beyond. The acquisition is expected to result in incremental revenue and cost synergies, resulting in higher earnings growth beyond 2011. If successful, Oracle’s new strategies would lead to higher top-line and bottom-line growth, with increased traction from the combined product portfolio.
However, these positives have already been priced into shares, leaving little room for above-market gains. Thus, near term there is no driving catalyst for the stock.
Consequently, we are reiterating our long term Neutral rating on Oracle shares.
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