Jefferies Lifts Profit View of Oracle

Jefferies & Co. raised its earnings estimates of Oracle Corp., reflecting a shift from end calendar 2010 to end fiscal 2011. The estimates revision followed the software major’s very strong first-quarter results, beating license, hardware, total revenue and earnings expectations.

The brokerage raised its price target on shares of Oracle to $31 from $28, while maintaining its ‘buy’ rating.

Oracle reported first quarter NG license of $1.3 billion, revenue of $7.6 billion, EPS of $0.42, well ahead of Jefferies’ estimates at $1.1 billion, $7.3 billion, $0.73 and Street estimates at $1.1 billion, $7.3 billion and $0.36.

The company’s fiscal second-quarter guidance is $1.75 billion to $1.92 billion for license, $8.16 billion to $8.40 billion for revenue and $0.44 to $0.46 for EPS, vs. Jefferies’s previous estimate of $1.75 billion, $8.19 billion, $0.44 and Street estimate of $1.8 billion, $8.2 billion and $0.45.

“While Oracle did have a $0.02 EPS benefit from tax, the clean EPS beat was still $0.03. Guidance for second quarter at the mid-point is just above Street on license/ total revenues, in-line on EPS. Given Oracle’s record of prudent guidance, trends on hardware revenues and margins, and the forthcoming new product releases, we think the set up looks decent,” said Ross MacMillan, an analyst at Jefferies.

Although foreign exchange was less of a headwind than guided (-1 percentage point v guide of -3 percentage point), license growth was 25 percent year-over-year to $1.3 billion vs. the analyst’s 10 percent year-over-year estimate. Hardware revenues were $1.08 billion vs. the analyst’s estimate of $1.0 billion and total revs grew 50 percent to $7.59 billion vs. his 44 percent year-over-year estimate.

The analyst said hardware gross margin grew to 48 percent (up 2 percentage point sequentially) and Sun support gross margin was flat sequentially at 56 percent. Operating margin of 38.8 percent was ahead of the analyst’s 38.0 percent estimate.

NG EPS of $0.42 ($0.40 adjusted for the low tax rate) was $0.05 ($0.03 adjusted) ahead of the analyst’s estimate. In the context of first quarter results, second quarter guidance looks conservative.

“With Oracle’s strategy of integrated software and hardware systems gaining traction (a $1.5 billion pipeline for Exadata), new system and application product releases coming, and second quarter guidance that looks reasonable, we remain positive on the stock. We have raised estimates and moved our price target to $31 reflecting a shift from end calendar 2010 to end fiscal 2011,” said Ross MacMillan.

Management commented: average deal sizes seem to be growing, hardware gross margin should be 50 percent this quarter and can increase to 60 percent-plus over time, Oracle can double the size of the hardware business, and the Exadata pipeline is now $1.5 billion (from $1 billion last quarter), Jefferies said in a report to clients.

The analyst said the management also commented on the results that more hardware + software combo systems are coming - expected to see a ZFS storage appliance at Oracle World, and Oracle expects to exceed the fiscal 2011 $1.5 billion and fiscal 2012 $2 billion operating profit target contribution from Sun.

“Oracle remains an attractive large cap software investment, given new product introductions, actions to drive higher profitability and growth in the Sun business and (even after the stock price move) moderate growth expectations embedded in valuation,” said Ross MacMillan.

The brokerage increased its 2011 EPS estimate for Oracle to $1.97 on revenue of $34.514 billion from $1.87 on revenue of $33.219 billion and its 2012 estimate to $2.25 on revenue of $37.640 billion from $2.18 on revenue of $36.142 billion.

Oracle shares closed Thursday down 1.48 percent at $25.36 on the Nasdaq, while in after-hours the stock rose 4.61 percent to trade at $26.53.