Oracle Set To Report Strong 2Q; Hardware Remains Key Wildcard

Oracle Corp. (ORCL), one of the world's biggest enterprise software makers, is expected to report better-than-expected numbers, when it reports second quarter results today after the market closes.

The results are expected to be aided by a growth in the software license revenues, driven by Oracle Fusion Middleware, business intelligence, PeopleSoft and E-Business Suite, and ongoing strength in its Exadata storage servers.

Wall Street is expecting California-based Oracle to earn 46 cents a share on revenue of $8.34 billion, according to analysts polled by Thomson Reuters.

We expect Oracle to report good F2Q results with EPS upside likely as we believe the company executed well on its strong pipeline in the quarter, FBR Capital Markets analyst David Hilal wrote in a note to clients.

RBC Capital Market analyst Robert Breza also sees Oracle's results and guidance slightly ahead of expectations.

Positive checks on new software licenses and product support revenues should allow Oracle to exceed consensus of $8.34 billion/46 cents by approximately $150-$200 million and 2 cents to 3 cents by our estimates, Breza said.

Oracle gets a major chunk of its revenue from support contracts for its database and business application software. In the first quarter, Oracle's revenue mix was 63 percent software, 23 percent hardware and 14 percent services.

Oracle is expecting an uptick in revenue from the sale of new software licenses for the second quarter. In the first quarter, Oracle reported software revenues of $4.74 billion, and out of that support business accounted for $3.45 billion.

Since, Oracle generates over 50 percent of its revenue outside of the U.S., the company's revenue is exposed to currency fluctuations. Oracle has guided for a 4 percent negative currency impact on year-over-year revenue growth, assuming exchange rates held steady.

However, with the dollar depreciating sharply against the euro and yen in late September and October, the currency headwind is estimated to be milder than expected.

Meanwhile, analysts say that Oracle's PeopleSoft and E-Business Suite solutions are experiencing an upgrade cycle as customers are trying to avoid extra costs of support of older versions.

Furthermore, many new features in database and middleware that Oracle typically adds as extra-cost, add-on options (e.g., Configuration Management, Active Data Guard, etc.) continue to drive incremental license revenue growth for Oracle.

Hardware - A Key Wildcard

Meanwhile, investors' key focus will be on Oracle's hardware business, which has been formed after Oracle's $7.3 billion acquisition of Sun Microsystems.

The acquisition seems to be bearing fruits as Oracle generated $1.7 billion in hardware revenue in the first quarter, indicating Oracle could be challenging Hewlett-Packard Co. (HPQ), IBM Corp. (IBM) and Dell Inc. (DELL) in the server market in the coming days.

Recently, Oracle unveiled Exalogic, a successor to Exadata that offers a tightly integrated hardware and software solution that will be beneficial for a large number of companies that don't want to assemble their own infrastructure layers.

Market analysts say that the Sun hardware business is starting to stabilize and Oracle continues to build on its Exadata and Exalogic product lines, which could offset investors' concerns over the outlook for standalone Sun hardware.

We believe both these product releases could help license sales as we look into next year, Jefferies analyst Ross MacMillan said.

Caris & Co analyst Curtis Shauger sees the Oracle's hardware business remains a key 'wildcard' for the company. While it remains a little unclear how these products will impact near-term hardware revenue, we believe ORCL is laying the groundwork for long-term market share gains in the server market.

Acquisitions

Analyst MacMillan also said Oracle should pursue more meaningful acquisitions like Sun Microsystems.

To date, Oracle has made roughly fifty acquisitions over the last five years, spending nearly $28 billion in the process. After grabbing Sun Microsystems, Oracle has announced 9 acquisitions including Phase Forward for about $685million and Art Technology Group for about $1 billion.

..with over $24 billion cash and investments on its balance sheet, ORCL has plenty of scope to do something much more meaningful, MacMillan wrote in a note to clients.

Recent Developments

Oracle has been in the news recently after Oracle CEO Larry Ellison publicly criticized HP for sacking his friend Mark Hurd as CEO. Hurd eventually joined Oracle.

Last month, Oracle won a key copyright infringement case against archrival SAP AG (SAP). A U.S. District Court ordered SAP AG pay Oracle $1.3 billion in damages, one of the largest awards ever given in a copyright infringement suit.

Stock Movement

In the second quarter, shares of Oracle rose 20 percent after its strong first quarter results in September and now trading in the $30 range. Oracle's shares are currently trading near their 52-week high.

Oracle shares ended Wednesday's regular trading session at $30.49 on Nasdaq. For the past 52-weeks, shares have been trading in the range of $21.94 to $30.75.