Oracle Q4 Earnings Preview

| About: Oracle Corporation (ORCL)

There is an accepted swap or trade-off when it comes to investing in certain companies or certain sizes. Particularly in technology; the bigger the company, the less enthusiastic you should be about their growth prospect. I have learned and highlighted such a lesson recently in Cisco (NASDAQ:CSCO).Typically, bigger companies tend to be less volatile; they offer investors more security, and more often than not, they apply more conventional philosophies towards spending, thus all but eliminating their ability for speedier growth (if at all).

To date, Oracle's (NASDAQ:ORCL) has shown that they are the exception and not the rule to what I have just highlighted above. While that sentiment can be arguably applied to companies such as Microsoft (NASDAQ:MSFT), or even Adobe (NASDAQ:ADBE) to a lesser extent, Oracle was not invited to the laggard growth club. I sold my position last year out of anger, partly because of undue criticism that had been attached to the company for being too aggressive and constantly overspending. At the time, I was also upset on their stance as it relates to its dividend. As much undue condemnation has been heaped onto the company, the business recipe appears to have been executed quite well.

In the company's third quarter earnings results, they reported a rise in net income of 78% to $2.1 billion over the same period last year. At the time, Oracle attributed the growth to strong software sales and an improving hardware business. Not only did revenue for the quarter jump 37% to $8.8 billion, but also revenue from new software license sales rose 29% to $2.2 billion year over year. Revenue from the core business, which includes licensed software as well as product support, increased by 13% to $3.7 billion. Co-President Safra Catz said that Oracle's hardware product gross margins increased to 55% in the quarter so they are now completely confident that they will exceed the $1.5 billion profit goal we set for the overall Sun business for the current fiscal year.

During the Q3 conference call, Oracle also signed a number of large deals "with some of the biggest names in cloud computing," (NYSE:CRM), CEO Larry Ellison said in a statement. "'s new multi-year contract enables them to continue building virtually all of their cloud services on top of the Oracle database and Oracle middleware," he added.

With the purchase of Sun Microsystems, it is clear they now have their sights set strategically to be a "one stop shop" for clients. They wanted to provide customers with mission-critical solutions that integrate easily and rapidly and can also span both hardware and software. So far this quarter it appears as if they are on track to report outstanding results for the period that ended May 31st. Many analysts are expecting a slight increase in sales; on average roughly twelve percent increase to just under $11 billion dollars.

Analysts are also projecting an 18 percent jump in profits to 71 cents per share. While I think these are pretty aggressive expectations, it remains tough for me to expect Oracle not to beat them pretty handedly. But as with most investors, I will be tuning in closely to see how they guide for the rest of the year; this will be what impacts the stock the most in the near term. Speaking of the stock, it can use a jump at the moment. It is down 10% since the end of April. While it trades at just under 14 times expected earnings, the stock trades at a P/E almost 4 points higher than that of its peers.

We discussed previously about the competition that Oracle stands to face from the likes of IBM (NYSE:IBM), Cisco, SAP (NYSE:SAP), Microsoft, as well as Hewlett-Packard (NYSE:HPQ). But with Oracle's leading business applications and leading database software solutions, they will face much stronger demand for their products, particularly with its increasing integration in business software, hardware, platforms and use. As I noted previously, they have specifically targeted both Hewlett-Packard and IBM, both among the company's biggest rivals.

In a way to demonstrate their keen sense of the competition, Oracle had previously announced that they would stop developing software for Intel's (NASDAQ:INTC) Itanium chips. While some had speculated that this is due to HP's Integrity servers having titanium processors, it appears there were some truth to the suspicion. On Wednesday of last week, we learned that HP has filed a lawsuit against Oracle claiming that they have illegally decided that future versions of its database software won't support a particular line of HP servers.

Those servers use a chip called Itanium that Oracle insists is being phased out, a claim that the chip's maker, Intel, has denied. In the lawsuit, HP accuses Oracle of anti-competitive behavior, breaking a promise to continue supporting Itanium machines and of the use of "strong-arm tactics to coerce customers into replacing their HP servers with Sun servers they do not want." Oracle's foray into the computer hardware market - an HP stronghold - began with its $7.3 billion acquisition of struggling Sun Microsystems last year.


There is no priority above the company's mission that does not involve being a dominant technology company well into the future. Oracle's CEO Larry Ellison has shown that he and his team are not only able to move Oracle in the right direction; they are going to sustain their growth ratios and increase profitability. They are expecting to exceed their goal of $1.5 billion in operating profit in the first full fiscal year following the Sun acquisition, on top of their $4 billion scheduled for R&D this year.

Being a dominant tech player is at the top of every Oracle mission. So far this year they have not disappointed. At $32 per share the stock remains incredibly cheap. Though the 10% drop since April has been a slight disappointment, I have every confidence that the stock will breach $40 by the end of the year. Q4's soon-to-be released earnings announcement will affirm why you should agree.

Disclosure: I am long CSCO, ORCL.