Oracle Expected to Report a Strong Quarter

Includes: BEAS, ORCL
by: Larry Dignan

Oracle (NASDAQ:ORCL) will report its fiscal third quarter earnings after market close today, Wednesday, and by most counts the company has bucked any economic downturn and should turn in strong results.

Analysts are expecting earnings of 30 cents a share for the February quarter on sales of $5.4 billion, according to Thomson Financial.

Here’s the gist of what most analysts are saying:

“We expect the company to meet or exceed both top- and bottom-line estimates despite a challenging macroeconomic environment,” says Philip Rueppel, a Wachovia analyst, in a research note. “We feel the long tail of Oracle’s acquisition strategy is underappreciated by the market.”

Translation: Oracle’s long-tail is a bunch of acquisitions that deliver maintenance revenue even if the IT spending cycle grows longer. Couple that maintenance revenue stream with diversification geographically and by vertical and Oracle should do well. Expect results similar to what Oracle delivered in the second quarter.

As for the outlook, analysts expect Oracle to remain upbeat about the fourth quarter. Why? It’s likely that Oracle will close the BEA (BEAS) acquisition in its May quarter. That fact should enable BEA to absorb any headwinds in Oracle’s business, says Merrill Lynch analyst Kash Rangan in a research note.

Rangan writes:

BEA could add license synergies of $400-450mn on top of its $540mn license base — some protection against softness in Oracle license growth if IT spending gets hit. We estimate Oracle has 50-55% share of DB (databases) deployed with BEA app server/middleware licenses (DBs are used in most app server projects).Oracle could potentially generate up to $300mn in incremental licenses by crossselling its DB into a greater percentage of BEA’s app server/middleware deployments.

Rangan is projecting license revenue of $1.68 billion, up 21 percent from a year ago with $1.12 billion in database revenue and $547 million in applications.

Brendan Barnicle, an analyst at Pacific Crest, says that Oracle’s third quarter is shaping up to be mixed with spotty middleware sales offset by strong applications and some big customer wins. He expects Oracle to beat estimates and raise its outlook due to BEA.