ORCL Preview: Estimates Are at Risk

The Street is looking for earnings of 34 cents per share on $5.8 billion in sales when Oracle (ORCL - commentary - Cramer's Take) reports after the close tonight, but it seems increasingly possible that those numbers are at risk. Companies selling $25 billion a year in anything depend on large deals ($1 million-plus) to accumulate that level of sales, and big-ticket capital expenses are always the first items to be reviewed when companies tighten their belts. Software is doubly at risk, because it doesn't wear out like physical capex; you can always get by with your existing systems for one more quarter, especially when your own business is not growing at the moment.

A number of analysts are reporting that their Oracle channel checks show some application deals being deferred, but the surprise might be weakness in database/middleware as well. The huge dollar rally does not help either, as a majority of sales are overseas. A number of other apps vendors, such as SAP (SAP - commentary - Cramer's Take) and Lawson Software (LWSN - commentary - Cramer's Take), are reporting weak sales, which would confirm the difficult environment.

The trends are mixed within Oracle's apps segment. Enterprise Resource Planning (ERP), which includes PeopleSoft and E-Business Suite, is sounding especially weak, while Hyperion sounds OK. New "edge" apps, such as Agile and Oracle Transportation, are attracting attention, but they depend on ERP strength to drive sales. Apps overall will be down year over year.

Even if Oracle misses tonight, the results won't be a disaster; the company would have preannounced if that was the case. More likely, forward guidance will be taken down materially, as it has been recently for almost every other technology company. It is almost predictable that management tonight will report that some large deals "slipped out of the quarter" (i.e., didn't close before quarter-end) but that they are not lost, just deferred. Your salespeople always whisper that in your ear. On the positive side, Oracle does have a large predictable base of maintenance contract revenue, which is generally invariant to economic conditions, so forward guidance is unlikely to be disastrous either.

---

At the time of publication, Dvorchak had no positions n the stocks mentioned, although positions can change at any time.

Gary Dvorchak is a managing partner of Aviance Capital Management, a Sarasota, Fla.-based institutional asset manager that manages $200 million in growth and value equities and fixed income. Dvorchak holds a master's degree in business administration from Northwestern University and a bachelor's degree in computer science from the University of Iowa.