Oracle's second quarter: A mixed bag, cost cuts likely

Oracle reports its fiscal second quarter results 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 analysts such as Oppenheimer's Brad Reback expect 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 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 ORCL will have difficulty reaching 2Q guidance and will likely lower revenue expectations Thursday. The question is what happens to margins and EPS. Based on historical expense/employee data, we believe ORCL can cut about $700M of expenses without having to reduce headcount, basically offsetting a ~10% decline in CY09 license revenue (the 10% is less than half the reduction ORCL saw in 2002). Any further expense actions would likely entail headcount reductions. Note 6% of headcount was cut in FY00, 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 reps missed their targets in the quarter, but quotas were so high that the company may have squeaked out some revenue gains year over year. 

Add it up and you have:

• Worries about Oracle's revenue growth (but most expect earnings will be fine);
• All eyes on the applications business;
• Solid database and middleware;
• And 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.