Will Oracle (ORCL) Disappoint this Earnings Season? - Analyst Blog

Oracle Inc. ( ORCL ) is set to report second-quarter fiscal 2015 results on Dec 17, 2014. In the previous quarter, the company delivered a negative earnings surprise of 1.67%. The company has delivered positive earnings surprises in only one out of the last four quarters, resulting in an average beat of a negative 1.84%. Let's see how things are shaping up for the upcoming announcement.

Factors at Play

Oracle enjoys a dominant position in the enterprise software and database management system (DBMS) software market. According to market research firm Gartner, global spending on IT infrastructure is estimated to grow 2.6% to $3.8 trillion in 2014 and exceed $4.3 trillion by 2018. Among infrastructure, DBMS is expected to enjoy strong growth driven by Big Data and digitalization initiatives. We believe that Oracle's leading position in the DBMS software market will make it the primary beneficiary of this increased spending. The new 12c multi-tenant, In-Memory database system will help the company win new customers and drive sales over the long run.

Moreover, the company's low-cost engineered systems (Oracle Virtual Compute Appliance) are expected to attract price-sensitive customers over the long term. In this context, the company also launched the latest Appliance Manager Software for Oracle Database Appliance, an engineered system comprising hardware and software that offers optimum database solutions. Over the long run, we expect that in addition to Exadata and Exalogic, the strong adoption of SPARC Supercluster, Exalytics and Big Data Appliance will accelerate Oracle's growth.

Although Oracle's growing cloud business is a significant positive, we believe that the business model transition will hurt revenue growth over the next couple of years. The company expects to gain a significant part of its revenues from SaaS compared with legacy on-premise licensing business. However, SaaS revenues will not be recognized upfront as in the case of license business, which will hurt top-line growth in the near term. The company's growing low-margin IaaS business will also hurt profitability in the long run.

Further, Oracle faces significant competition in most of its operational markets (database, applications, storage, cloud computing) from the likes of EMC, International Business Machines Corporation ( IBM ), Hewlett-Packard Company ( HPQ ), Microsoft, Sybase, SAP,, Workday and Teradata. The trend toward consolidation is increasing competition for the company in most of these markets.

Earnings Whispers?

Our proven model does not conclusively show that Oracle is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at a loss of 64 cents. Hence, the difference is of 0.00%.

Zacks Rank : Oracle's Zacks Rank #3 (Hold) when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

A stock that, as per our model, has the right combination of elements to post an earnings beat this quarter is:

Red Hat Inc. ( RHT ) with an Earnings ESP of +3.70% and a Zacks Rank #3.

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ORACLE CORP (ORCL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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