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Oracle's second quarter to be a mixed bag

Analysts agree that Oracle is much better positioned for a recession than it was last time. Could it cut $700 million in expenses, though, without reducing headcount?

This was originally posted at ZDNet's Between the Lines.

Oracle reports its fiscal second-quarter results on Thursday, and analysts are expecting weaker-than-expected license revenue, healthy maintenance subscriptions, a potential earnings miss, and some belt-tightening on deck. In other words, expect a mixed bag.

Wall Street is expecting earnings of 34 cents a share, excluding items and 26 cents a share fully loaded. Revenue is expected to be $5.86 billion, with gross margins of 77.5 percent, according to Thomson Reuters estimates. Analysts expect Oracle to deliver third-quarter earnings of 34 cents a share on revenue of $5.9 billion, but many expect that outlook to be cut.

According to various research reports, Oracle may have had difficulty closing deals in late November. Couple those problems with macroeconomic headwinds and analysis such as that of Oppenheimer's Brad Reback, who expects Oracle to cut costs and its outlook.

Reback reckons that Oracle can cut about $700 million to preserve profit margins without layoffs. Reback has noted that Oracle's headcount has swelled due to acquisitions, but that expenses per employee has remained at the company's historical $150,000 per employee plateau. Why? More international workers at lower pay.

Reback writes:

Given the macro environment, we believe (that Oracle) will have difficulty reaching (second-quarter) guidance and will likely lower revenue expectations Thursday. The question is what happens to margins and (earnings per share). Based on historical expense/employee data, we believe ORCL can cut about $700 (million) of expenses without having to reduce headcount, basically offsetting a (roughly 10 percent) decline in (calendar year 2009) license revenue. The 10 percent is less than half the reduction ORCL saw in 2002. Any further expense actions would likely entail headcount reductions. Note that 6 percent of headcount was cut in (fiscal year 2000), the largest such move over the last decade.

As for the details, Piper Jaffray analyst Mark Murphy is predicting a mixed quarter. In checks with 12 players in Oracle's ecosystem, he called the second quarter a jump ball. Here's what Murphy found:

  • Oracle likely closed a $78 million deal in the quarter
  • Business is solid among government customers
  • Middleware and business intelligence apps are selling well
  • Oracle Unbreakable Linux and Oracle OnDemand have minimal uptake
  • Oracle is gaining share
  • Customers aren't pressuring Oracle on maintenance pricing or renewals

Other analysts echo those points. Pacific Crest analyst Brendan Barnicle adds that the second quarter could have been much worse. Barnicle notes that many Oracle sales representatives missed their targets in the quarter,but quotas were so high that the company may have squeaked out some revenue gains year over year.

Nevertheless, application sales are slipping. Barnicle is expecting 3 percent growth for Oracle's new technology license revenue in the fiscal second quarter and a 10 percent decline in new application licenses.

Add it up, and you have:

  • Worries about Oracle's revenue growth (but most expect that earnings will be fine)
  • All eyes on the application business
  • Solid database and middleware
  • Plans to improve operating margins to navigate a downturn and currency fluctuations

One thing is certain: analysts agree that Oracle is much better positioned for a recession than it was last time around.