NEW YORK (CNN/Money) -
The Oracle-PeopleSoft hostile takeover battle has been a fun tale to watch unfold.
But there's a more important story regading Oracle: the company's crucial fiscal third quarter earnings report Thursday. Since Oracle's third quarter ended in February, this will be the first chance for investors to get firm data on whether demand for software has really begun to improve.
So instead of focusing on amusing verbal jabs that Oracle CEO Larry Ellison tosses at PeopleSoft CEO Craig Conway or the Department of Justice (there's sure to be some), investors should pay close attention to Oracle's results and what the company has to say about the corporate spending environment.
"The PeopleSoft drama is just that: drama and chatter," said Gary Abbott, an analyst with Merriman Curhan Ford. "Investors need to adjust their antennas and focus on the underlying fundamentals of the business."
All eyes on apps
Analysts are expecting the database software giant to report earnings of 12 cents a share for its fiscal third quarter, a slight improvement over the 11 cents per share profit a year ago. The consensus sales estimate is $2.51 billion, a 9 percent jump from the same period last year.
Drilling down a bit, Wall Street will be keeping a close watch on license sales. Software companies like Oracle also generate a large portion of revenue from services and maintenance, but analysts tend to focus mainly on the health of license sales since it is a key gauge of new demand for software.
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Overall license sales increased a stronger than expected 13 percent in the second quarter.
There will be a particularly sharp focus on Oracle's application license sales, which grew 27 percent in the second quarter. Oracle is trying to make a bigger foray into the more lucrative application software business, which includes software that helps large corporations automate routine business tasks such as customer relationship management and supply chain management.
Oracle's bread and butter database market is maturing. It is also coming under more competitive pressure from the likes of IBM and Microsoft. And it's primarily for these reasons that Oracle is trying to buy PeopleSoft, which is a top competitor in the application business.
For the third quarter, FTN Midwest Research analyst Trip Chowdhry said he expects license revenue of about $800 million, which would be 6 percent higher than a year ago. But Oracle will probably need to show continued momentum in the applications business to please Wall Street.
To that end, Abbott's expectations are even higher, with projections of $875 million in total license revenue and application license revenue of about $170 million.
Will Oracle boost guidance?
Guidance will be crucial as well. Oracle's fiscal fourth quarter is typically its strongest. Analysts are expecting sales of $3.1 billion, an 8 percent increase from a year ago. The consensus earnings estimate is 18 cents a share, a 12.5 percent improvement from the same period last year.
Chowdhry said Oracle should reaffirm this guidance but he is not expecting the company to hint that demand is improving significantly -- and that could put further pressure on shares of Oracle and other software companies.
Oracle (ORCL: Research, Estimates) shot up more than 10 percent during the first few weeks of the year but the stock has declined sharply in recent weeks. Shares are now trading at a slightly lower price than where they were before Oracle issued its strong second quarter report in December.
Rivals PeopleSoft (PSFT: Research, Estimates), SAP (SAP: Research, Estimates) and Siebel Systems (SEBL: Research, Estimates) have also pulled back as of late.
"The market was overly optimistic about the strength of a recovery in technology spending," Chowdhry said. "The recovery is quite subdued. Things are improving but it is extremely gradual."
Abbott thinks that longer-term, investors should pay more attention to the database side, since it still does account for more than 80 percent of Oracle's total license sales. He concedes though that in the short-run, Wall Street will probably react more to the applications numbers and any more PeopleSoft news.
But even though the database business is less sexy than the applications side, Abbott said database sales should continue to increase at a steady clip, thanks to new products for the Linux operating system. "As the database goes, so goes Oracle," Abbott said.
Analysts quoted in this piece do not own shares of Oracle and their firms have no investment banking ties to the company.
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