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Software giant Oracle, now a hardware company as well thanks to its purchase of Sun Microsystems, reports earnings on Thursday after the close of trading, and at least one analyst believes there will be no major surprises.
That's good or not so good, depending on your perspective. It could be argued that Oracle's (NASDAQ: ORCL) only significant competitor on a soup-to-nuts, hardware and software basis is IBM (NYSE: IBM). On the other hand, Oracle isn't in a high-growth industry. Much of its growth has come from acquisitions in recent years, and there aren't that many big targets left for it any more.
There's also the added pressure on Oracle's margins from Sun. As Broadpoint.AmTech analyst Yun Kim noted in a research note on the company earlier this month, Oracle currently enjoys the highest operating margin in the industry and is a relentless cost cutter.
Sun, however, is a hardware company, and hardware is not known for being a high margin business (with Apple a notable exception) and could cause "Oracle's overall margin profile to decline substantially and it may be weighed down for some time while the company digests the acquisition," Kim wrote.
Still, Kim expects Oracle to meet estimates with revenue for the third fiscal quarter ended February 26 of $6.41 billion, a 9 percent improvement over the second fiscal quarter and a 17 percent improvement over the same quarter last year. Oracle should report net income of $1.9 billion, or $0.37 per share.
Agreeing with Kim, a consensus survey by Thomson Reuters estimates Oracle will report earnings of $6.35 billion and EPS of $0.38.
One potential area of softness might be the benefit for currency. Recent strength in the U.S. dollar versus the Euro could likely lead to much less than the 7 to 8 percent currency benefit Oracle had forecasted for the quarter. But Kim added he does not expect weaker-than-expected currency to have any significant impact on its non-GAAP EPS.
"We believe its core database business remains solid, although certain local regions and certain verticals faced a more challenging sales environment than expected. Within its database business, ORCL's middleware business put together yet another strong performance. We believe its application business is likely to remain lackluster," Kim wrote in his note.
All things considered, he does not project any significant changes to projections as a result. Sun, he wrote, will not be a distraction for now. "We believe that investors are likely to focus on Oracle's core business in the near-term and not put too much emphasis on Sun's business as long as it continues to reaffirm its FY11 financial targets, which includes contribution from Sun," he wrote.
Sun is expected to provide around $635 million, $1 million off from an earlier projection by UBS, and it will provide around $1.22 billion in product and services revenue next quarter, according to Kim.
The fourth fiscal quarter ending in May is traditionally Oracle's busiest for the year. Kim projects Oracle will report revenue of $9.61 billion and non-GAAP income of $2.71 billion, or $0.58 per share.