Oracle's hardware worries surface again as analysts eye Q4

Wall Street's hardware handwringing comes a week after Oracle rolled out its master cloud services plan.

Oracle will report its fourth quarter earnings June 21 and the worries about whether the company can bolster its hardware business continue.

The company is expected to report fourth quarter earnings of 78 cents a share on revenue of $10.9 billion. Wall Street analysts, however, project a mixed quarter ahead. Based on channel checks from analysts, Oracle's hardware sales were weak while software was mixed, but in line with expectations.

Wall Street's handwringing comes a week after Oracle rolled out its master cloud services plan.

Jefferies analyst Ross MacMillan said that Oracle is seeing the effects of conservative IT spending. MacMillan said:

Our most recent field work suggests F4Q12 business trends were mixed, with license likely in line while hardware again sounded weak. The deal activity that we heard of was mostly transactional but we did catch wind of one very large transaction (around $50 million)...Many of the partners we spoke with commented that biz continues to be impacted by customers’ conservative IT spending behavior. From our conversations with EMEA-based partners we think that biz likely slowed somewhat in Europe as macro factors impacted close rates.

The wild card for these Oracle prognostications is that the company's direct sales force is taking more deals from its partners. That reality may mean that Oracle's results handily outrun any partner pessimism. Oracle's first quarter outlook should be solid given the company will get a revenue boost from recent acquisitions like Endeca, Taleo and RightNow.

Barclays analyst Raimo Lenschow said that Oracle's risks are largely balanced, but the company is facing economic concerns as well as a headwind from a strong U.S. dollar.

Morgan Stanley analyst Adam Holt was more positive. He noted that almost 80 percent of Oracle's operating income comes from existing customers. That means that new product cycles---Fusion, Exalytics, Exadata---can fuel better than expected gains.

Holt said:

Given a significant recurring revenue stream coming from software and hardware support, as well as its existing OnDemand business, we can ascribe value to the company’s highly visible recurring installed base, which represents nearly 80% of the company’s operating income. We value the current recurring revenue base in Oracle at ~$22.43/share — which along with $3/share in net cash represents >95% of the current trading price.