Seeking Alpha
Long/short equity, special situations, research analyst, newsletter provider
Profile| Send Message|
( followers)  

Oracle (NYSE:ORCL) has had a string of disappointing earnings releases. This has made analysts conservative this quarter … at least with their official numbers. The company has not been able to beat the Earnings Whisper ® number since June of 2012 and the last couple of quarters the company has reported near the low-end of its guidance range. So, analysts being conservative creatures by nature have put their estimates for the fiscal first quarter at the low-end of its guidance range. This gives upside room to estimates because one important thing is different this quarter - the cloud.

In the past, Oracle's numbers have been volatile due to the large licensing revenues. In addition, since the licensing deals are often closed near the end of the quarter, it made it difficult for analysts to track. As a result, licensing revenue numbers often were the biggest surprise for the company once the results were announced. The cloud is starting to decrease this volatility. Some of Oracle's software is available on the cloud as a subscription service rather than a large, upfront licensing fee. This makes for a smoother revenue stream. The downfall of this was shown last quarter, which tends to be the largest quarter of the year for licensing deals. The migration away from licensing to subscriptions meant weaker large licensing deals in favor of smaller subscription fees. Those subscription fees are recurring though, so a benefit should be viewed this quarter, which happens to be the weakest quarter for licensing deals. The weaker licensing deals will have less of an impact and the strong subscription revenue will play a bigger role in the company's line item: "New software licenses and cloud software subscriptions".

That's just part of the cloud story though because Oracle, which is the largest database provider in the world, didn't have a database product for the cloud. As a result, the fastest growing demand for new software was leaving Oracle behind. That is now changing with the company's launch of its 12c database for the cloud. This is expected to drive license growth starting in the current quarter and accelerating throughout the year, and recent checks have been positive for 12c licensing.

There is another factor that caused Oracle's miss last quarter but should be a positive this quarter - the Euro. We've often pointed out the correlation between Oracle's stock price and the Euro and we tend to lean towards this being a negative for Oracle over the next couple of quarters as the U.S. outperforms Europe. Last quarter, it certainly was a negative as the company attributed a penny of its earnings per share miss to currencies. During the fiscal first quarter, however, the Euro was up 1.5% and that puts upward pressure on both revenue and earnings for the quarter.

That brings us back to the company's guidance. Last quarter Oracle said it expected to report non-GAAP earnings of $0.56 to $0.59 per share on revenue of $8.46 billion to $8.70 billion. Consensus estimates are at the low-end of this range with earnings of $0.56 per share on revenue of $8.48 billion. Yet, with the solid subscription revenue, the favorable currencies, and analysts' recent 12c checks, expectations have ticked higher recently. As a result, the Earnings Whisper ® number is $0.58 per share.

More importantly though, the 12c sales are expected to lift estimates going forward and the positive Euro since the quarter closed should also help the company's guidance. The expectations are that guidance will at least be in-line with estimates and the commentary around the 12c sales will lift estimates beyond the quarter. Estimates are for revenue growth of 3.5% in the November quarter, giving the company its first back-to-back growth numbers of greater than 3% since 2011 and the 12c database launch is expected to accelerate to over 5% by the end of the fiscal year.

That brings us to the chart for Oracle. The chart shows estimates for next year have been trending lower since the company reported results in March. The stock has also been trending lower with multiple touches on the line drawn. With expectations that the trend in earnings estimates will reverse following its earnings release, it makes the case that the trend in the stock price will reverse as well. That means a move to the $33.50 area and a likely longer-term move higher.

EarningsWhispers Chart for ORCL
(Click to enlarge)

Adding to the upside room is the stock's valuation. As so many other cloud names trade towards peak multiples, shares of Oracle are trading much closer to its trough multiple of 9.3 times estimates. Just to get back to its 15 year average multiple, shares of Oracle need to be north of $45 using current estimates. When estimates are trending lower, valuations generally do trade towards their trough levels, but if estimates begin to move higher, then a move back towards its historical average multiple is reasonable.

Oracle is scheduled to report earnings after the market closes on Wednesday, September 18, 2013 with a conference call at 5:00 PM ET.

Source: Oracle's 12c Expected To Reverse String Of Disappointing Results