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THE DAY AHEAD: Can Oracle prove its critics wrong?

    COMMENTARY -- Oracle reports its second-quarter results after the bell Thursday and there’s every reason to believe it will safely beat the Street estimate. Analysts say it's a bargain among bargains right now.

    There are those who suggest recent departures of key executives like Ray Lane and Gary Bloom spell trouble for the database software giant.

    If this new-look version of Oracle executes as it says it can, that title may soon grow to include Internet application and database software giant.

    While the rest of the information technology universe is falling apart, Oracle (Nasdaq: ORCL) just keeps plugging along, improving sales in all key business units, expanding its tentacles, while consistently reducing operating expenses.

    First Call Corp. consensus expects Oracle to earn 10 cents a share in the quarter but everyone knows that anything less than a 1- or 2-cent-a-share upside surprise would be a disappointment.

    In a press conference earlier this week, CEO Larry Ellison essentially told investors to relax, quipping that he “slept fine over the weekend," a euphemism for 'We're going to blow some people away'.

    Last quarter, Oracle zipped past the official number by 4 cents a share, earning $501 million, or 17 cents a share, on sales of $2.3 billion.

    Steady growth across the board

    Total sales were up 14 percent from the year-ago quarter and operating margins exploded from 17.4 percent to 29.1 percent.

    Yet analysts knocked Oracle’s applications growth, which improved 42 percent from the prior year to $156 million.

    Meanwhile, its database sales improved 32 percent in the quarter, topping even the most optimistic estimates.

    It’s a safe bet that this quarter’s application sales, beefed up by its 11i e-business suite package, will finally put to rest any fears that Oracle wasn’t evolving into a premier player in this market.

    Those analysts who were disappointed that Oracle didn’t deliver 60 percent to 70 percent growth last quarter will be lauding Oracle’s execution this time around.

    “We live in an algebraically challenged society these days,” said Rob Tholemeier, an analyst at First Security Van Kasper. “Oracle represents a huge buying opportunity. If they grow application sales at anything north of 50 percent this quarter, they’ll be far ahead of any other big-cap company in this market.”

    Tholemeier, who maintains a “strong buy” on the stock, predicts Oracle will post sales of around $2.65 billion this quarter. He expects database sales to improve 17 percent from the year-ago quarter though he wouldn’t be surprised if they came in a point or two higher.

    “I think there also might be a nice Christmas surprise this quarter if its consulting business shows some significant improvement,” he said. “Its application business is growing much faster than the rest of its business therefore accelerating its total business.”

    Buying opportunity

    After quietly losing 38 percent of its value in the past three months, Oracle shares hover right around $30 with a price-to-earnings ratio of 28.

    Investors are understandably reluctant to jump back in right now, even for Oracle at that price.

    They want to look before they leap this time.

    CIBC World Markets analyst Melissa Eisenstat expects sales to improve 15 percent this quarter to $2.7 billion, compared to $2.5 billion in the year-ago period. She sees application sales jumping 49 percent to around $250 million, up from $168 million in the year-ago quarter.

    Operating margins are projected to come in at 31 percent, up from 25 percent in the year-ago quarter and 29 percent from the first quarter.

    Here’s a company that’s growing total sales, application sales, database sales and cutting operating expenses in each successive quarter. Yet the stock keeps getting pounded.

    “This is definitely a stock we are recommending people buy,” said Mark Verbeck, an analyst at Epoch Partners. “It’s trading at a premium right now but it’s well deserved. The other dynamic at work here is the database business is so well established that there’s very little risk.”

    Verbeck expects Oracle to earn 10 cents a share on sales of $2.6 billion, with applications sales accounting for $251.7 million.

    Ellison knows what he’s doing

    Back in November when then-executive vice president Bloom left to take the CEO post at Veritas (Nasdaq: VRTS), some analysts worried that Ellison, no longer flanked by longtime COO Lane, might not be up to the task.

    Maybe Ellison's style or temperment or ego would interfere with the company's ability to sell software, the argument went.

    "Bloom's departure renews concerns about the depth and makeup of Oracle's management ranks and the role of Ellison," said Chase H&Q analyst James Pickrel, in a research note back in November. "Ellison now has direct senior responsibility for both worldwide sales and all of product development."

    Not to take anything away from Lane or Bloom, but how could anyone question Ellison’s vision or execution in the past 10 years?

    That's a lot of talent to lose but there's still quite bit unmined within the ranks.

    Ellison told analysts not to fret about the application sales last quarter, predicting sales will improve at least 50 percent for the year or more, much more.

    If the application sales come in well above analysts’ estimates, it should spark the stock and possibly the Nasdaq composite to boot.

    "If Q1 for applications is a little bit slow, that does not mean Q2 for applications will be a little bit slower," Ellison said following its first-quarter earnings report. "It means Q2 will be spectacular. Spectacular."

    We'll see what he means by spectacular after the bell.