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Oracle's second quarter to be a mixed bag

Analysts expect the company, which reports its Q2 results this week, to announce a mixed bag including healthy maintenance subscriptions, potential earnings miss and some belt tightening on deck.

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.

Wall Street is expecting earnings of 34 cents a share excluding items and 26 cents a share fully loaded. Revenue is expected to be US$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 US$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 US$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 US$150,000 per employee plateau. This suggests 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 US$700M of expenses without having to reduce headcount, basically offsetting about 10 percent decline in CY09 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 6 percent 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 US$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. 
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 applications licenses.

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.

This article was first published as a blog post on ZDNet.com.