Updated from 7:08 a.m. EST
Dana Investment Advisors manages some $2.3 billion in funds for its clients. None of it is invested in
. "We're not real fans of growth by acquisition," says portfolio manager Duane Roberts. "They run the risk of the winner's curse -- paying too much."
Roberts' distaste for Oracle's recent bout of M&A fever is far from universal. But when the database giant reports third-quarter financial results after the market close Tuesday, Wall Street will be looking hard for indications that its $10.3 billion takeover of PeopleSoft is starting to pay off.
To be sure, the total amount of cash the PeopleSoft business will contribute to the February quarter isn't enormous. The defunct company would have closed its quarter at the end of December, which means that with the exception of a few business days in December, Oracle will get the benefit of only two months of revenue. Additionally, January and February were the old company's slowest sales quarters.
Even so, says Tony Ursillo, an analyst with Loomis Sayles, "the PeopleSoft application business will be a key focus; people are curious about how much license revenue it generated."
Said another sell-side analyst: "You can't spend $10.3 billion and not show something for it."
Estimates of license revenue, a good indicator of new business growth, are widely divergent, ranging from about $15 million to $90 million. The brutal fight with Oracle hit PeopleSoft's final quarters. But looking back to the third quarter of 2003, when PeopleSoft posted $160 million in license revenue, may give investors a better measuring stick. Total revenue in that quarter was $624.1 million.
The other big component of PeopleSoft's income statement was maintenance revenue, which is likely to range from $150 million to $200 million. However, under accounting rules related to acquisitions, it will be written down and recognized ratably in the future. Therefore, Oracle will present a pro forma revenue number that includes the maintenance fees and a GAAP number that doesn't. Most analysts will add back amortization, which brings First Call consensus to 15 cents a share pro forma.
Oracle's own application business, which at one time was derided as a 90-pound weakling, grew by a solid 57% in the November quarter, after four very weak quarters, and investors will be looking to see if the second-quarter results were a fluke, or an indication of solid, organic growth. Adding together license revenue, maintenance and services, the apps business contributed $685 million in the February quarter, about 25% of total revenue.
Even so, Oracle's core database business is much larger. Last quarter, which was rather disappointing, it contributed a total of $2.071 billion, an increase of 8%. Database license revenue also grew slowly, increasing by just 5% to $756 million.
Moreover, Oracle's spiffiest database technology, called RAC, grew by just 20% in the second quarter, after growing in excess of 60% for the four straight quarters, says Sanford Bernstein analyst Charles Di Bona. "If this metric does not improve, our assumptions regarding future growth of the database business may prove to be overly optimistic," he says. Bernstein doesn't have an investment banking relationship with Oracle.
Like Roberts of Dana Investment Advisors, Di Bona is generally skeptical about Oracle's ability to make the PeopleSoft acquisition pay off in the long run, although he expects this quarter to be good. "We think Oracle will find it difficult to achieve sufficient returns from its investment in PeopleSoft to justify the $10.3 billion price tag. This concern leads to broader concerns about Oracle's discipline as an acquirer, and ability to generate healthy returns from shareholder costs," he wrote in a note to clients published last week. Those concerns are in even starker relief since Oracle
touched off a bidding war with
, in an attempt to snag software vendor
prevailed in that battle Monday night.
But Ken Marlin, managing partner of New York-based investment bank Marlin & Associates, has a very different view. "I'm pleased that Oracle is aggressively trying to ensure that they are going to be the survivors of the software shakeout," he said during an interview.
Most analysts expect Oracle to easily hit its targets for this quarter, and there may well be some upside as well. There's also sentiment on Wall Street that the company is undervalued, said Ursillo, who says he is bullish on the quarter. At the moment, Oracle is trading at 16 times 2006 estimated earnings.
Even Trip Chowdhry of FTN Midwest Securities, a longtime critic, has changed his tune. He recently upgraded the stock to buy, and set an 18- to 24-month price target of $20, which is 26 times its 2006 earnings estimates. Shares closed Monday at $12.65. FTN doesn't have an investment banking relationship with Oracle.
One other bit of good news: A recent survey by Goldman Sachs found that the number of chief information officers who expect to buy more database software from Oracle over the next year is higher than at any time since the study began two years ago. Given last quarter's slowdown, the survey is encouraging, says Goldman Sachs analyst Rick Sherlund.
Parsing this quarter's results may be difficult, given numerous potential complications and uncertainly about how much clarification will come from Oracle. Still, it's likely that the quarter will be, as one analyst put it, "a gimme." But going forward, Oracle will have a lot more to prove.