(ORCL) Oracle Fourth Quarter 2011 Earnings Preview

After the closing bell today, Oracle Corp. (ORCL) is scheduled to release its fourth quarter 2011 results. In the run up to the earnings results, we do not notice any substantial movement of analyst estimates for the quarter.

Looking Back at 3Q11

Oracle, in its previous (third) quarter reported strong results on the back of robust top-line growth. The solid results were driven by approximately 29.0% year over year growth in new software license revenue.

Earnings (excluding one-time items but including stock-based compensation expenses) shot up 41.7% from 36 cents in the year-ago period to 51 cents per share in the third quarter, and surpassed the Zacks Consensus Estimate of 47 cents.

Revenues in the third quarter increased 37.0% year over year to $8.76 billion, driven by better-than-expected new software license revenues. Including revenues of $43.0 million related to assumed support software and hardware contracts, which will be recognized after fiscal 2011 due to certain accounting rules, non-GAAP revenues leaped 36.1% year over year to $8.81 billion. Revenues were also above the Zacks Consensus Estimate of $8.30 billion.

Expectations in 4Q11

For the fourth quarter, Oracle expects non-GAAP earnings at constant currency to range between 69 cents and 73 cents per share. Assuming the current exchange rate, earnings are expected to range between 65 cents and 69 cents. This was up from 60 cents reported in the comparable quarter last year and also above the Zacks Consensus Estimate of 69 cents.

Oracle expects a positive currency effect of 5% on license growth rates as well as on total revenue growth. Total revenue growth on a non-GAAP basis is expected to range from 9.0% to 13.0% at the current exchange rate and 4.0% to 14.0% in constant currency. The guidance assumes a non-GAAP tax rate of 28.0%.

New software license revenue growth is expected to range from 9% to 19% at current exchange rates and 4% to 14% in constant currency. Excluding Hardware support revenues, Hardware product revenue growth is expected to range from 6% to 12% at current exchange rates and 2% to 8% in constant currency.

Oracle does not expect the Japanese natural disaster to have any near term negative impact on the company.

Estimate Trend Revision

For the coming quarter, only one out of 18 analysts raised estimates in the last thirty days.

For fiscal 2011, there was just 1 upward revision in the last 30 days, leaving the Zacks Consensus at $2.11.

Analysts expect Oracle to report another strong quarter fueled by strengthening demand for both its hardware and software businesses.

Moreover, Oracle’s industry-specific application strategy, its engineered systems (Exadata, Exalogic) strategy, combined with the upcoming release of Fusion, is likely to help Oracle gain a larger market share than its rivals, namely International Business Machines Corp. (IBM), Hewlett-Packard Co. (HPQ), and SAP AG (SAP).

Our Take

Oracle Corp. has consistently exceeded estimates over the preceding four quarters. The average surprise in the preceding 4 quarters is a positive 10.23%, and another positive earnings surprise can be expected from the company.

Oracle will continue to report strong results based on its innovative product pipeline, improving margins, high recurring revenues, growth in hardware sales and increasing adoption of cloud computing over the long term.

We believe Oracle will benefit from its positioning with Sun hardware and Oracle software. The fact that both the Sun hardware and Oracle software enjoy a relatively higher-margin domain is an added bonus, indicating sustained profitability improvement in the ensuing quarters.

However, Oracle has been entangled in a lawsuit with Hewlett-Packard in which the latter has sued the former over discontinuing support for the Itanium-based servers.

In another case, Oracle has a claim against Google Inc. (GOOG) that could run into billions of dollars of damages for patent and copyright infringements. The case is scheduled for hearing in November this year. A verdict in favor of Oracle would be very lucrative for the company.

Despite the impending law suits, we believe that the increasing adoption of cloud technologies is an essential facet of Oracle’s growth story over the long term. Oracle is aiming to provide the infrastructure for companies to move toward cloud computing, where data is handled remotely in datacenters rather than on premises.

We maintain an Outperform rating (6-12 months) over the long term. Currently, Oracle has a Zacks #2 Rank, which implies a Buy rating on a short-term basis.

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