Oracle investors looking for blowout quarter

Analysts expect the database giant to report net profits of 13 cents a share this afternoon following market close, according to research firm First Call/Thomson Financial. One year ago, the company earned 8 cents a share during the same period.

Anticipation of a blowout quarter drove Oracle's shares up $3.75 to $85.56 in early trading this morning. Also this morning, Morgan Stanley Dean Witter analyst Chuck Phillips raised to "strong buy" from "outperform" and set a price target of $125.00 per share.

Besides per-share earnings, investors also will be focusing on revenue, operating margins and sales of key products. While the company is expected to post strong results in all areas, the real question will be whether Oracle exceeds the lofty expectations that have recently been built into the stock price.

Today's earnings report represents Oracle's first since the departure of former president Ray Lane. Lane, who is credited with helping Oracle recover from a disastrous accounting controversy that threatened its future, resigned abruptly in July following a power struggle with Oracle chief executive Larry Ellison. Lane became a general partner with venture capital firm Kleiner Perkins Caufield & Byers last month.

Several analysts expect Oracle to post revenues of $2.3 billion in the first quarter, up 16 percent over the previous year. Last year, Oracle posted a 13.5 percent increase in first-quarter revenues.

Chris Shilakes, a Merrill Lynch analyst, expects operating margins of 24.4 percent for the quarter, compared with 17.4 percent a year ago.

The improved margin, which could continue throughout the year, is a result of Oracle's efforts to cut costs by centralizing its resources, standardizing software across the company, and beefing up its e-business efforts.

"Management expects internal (information technology) costs to be cut in half by the end of the year as a result of the several-year effort," Rick Sherlund, a Goldman Sachs analyst, wrote in a recent report.

Oracle's first-quarter results will be buoyed by strong sales of its new business software, Oracle 11i, Shilakes said.

"We expect Oracle to report upside results for its first quarter," Shilakes wrote in a recent report. "The quarterly growth will be fueled by the new Oracle 11i applications launch and a favorable set of prior-year comparisons, which should also boost the year-to-year growth rates."

Oracle's application software helps track companies' human resources, financial and manufacturing operations.

The company is expected to rebound from its slow growth in database sales during the previous quarter, when it posted a 12 percent year-over-year growth rate and saw its share price take a hit.

Database sales are seen as the key to Oracle's financial health. While applications software has become a strong seller for Oracle, the bulk of its product revenue is still derived from database software sales.

Bob Austrian, a Banc of America Securities analyst, said he's expecting database sales to grow 22 percent in the first quarter. That growth would be on the high end of Oracle's past performance, typically about 15 percent, he said. Austrian noted the increase may be even larger, given the low comparison figures for last year.

Database and applications sales may be helped by a recent change in sales strategy implemented in the fourth quarter, analysts said. Under the new system, the company reduced the heavy price discounting that had been used to boost sales near the end of each quarter.

"Management is very bullish on the business outlook and reports a 'stunning' sales pipeline for its applications business in particular," Sherlund said.

But while analysts expect the database giant to beat Wall Street's expectations of net profits of 13 cents a share, it may take a blowout quarter to propel the stock. Simply meeting expectations could spook investors.

"A year ago, they matched the first quarter and then beat it by 2 cents in the second quarter, 4 cents in the third quarter and 6 cents in the fourth," said Chuck Hill, a spokesman for First Call. "If they come in at 13 cents on Thursday, there may be a problem when the markets open the next day."

Hill added Oracle will likely need to post earnings beyond the whisper number of 15 cents to see any stock price appreciation.

In expectation of a strong earnings report, Oracle shares climbed about 21 percent during August. Perhaps worried that the enthusiasm was a bit overdone, investors have pushed the price down 10 percent in September. Oracle shares closed yesterday at $81.81, up $2.44 for the day.

In sizing up the recent pullback, Richard Scocozza, a Bear Stearns analyst, said: "The valuation of Oracle, in terms of what you get for the (revenue growth), is on the high end of the valuation range. I don't believe this quarter will be a catalyst to move the stock up, but rather keep it where it is."