Oracle Earnings Preview: 'Good' News Might be Too Good

Oracle Earnings

So many times when companies report their quarterly earnings, the focus is not on the quarter past, but the quarter upcoming and if a company can raise its guidance, so much the better.

Unless you're talking about Oracle Corp [ORCL 16.87 0.13 (+0.78%) ] .

The company is set to report its fiscal second quarter earnings after the bell later today, and while there's a fair amount of interest in those numbers, analysts will be keeping a careful eye on the company's comments for its current quarter, especially with Oracle's bellwether status for enterprise customers.

The Street anticipates 34 cents on $5.86 billion, even though Oracle itself had projected 35 cents or 36 cents a share in profits. And that speaks to the issue of too much optimism. The Street, on average, already doesn't believe Oracle's own guidance and the analysts I'm talking to are skeptical that if the company raises guidance, it might not necessarily be taken as the "good news" it normally would. Incidentally, the range on the Street right now is 31 to 36 cents.

Brendan Barnicle at Pacific Crest Securities is looking for an inline quarter, along with $1.65 billion in licensing revenue, the other key metric by which Oracle is measured.

"The key thing is guidance," Barnicle tells me. "The biggest risk is that Oracle is too optimistic with the guidance." He's looking for 34 cents on $5.86 billion, and licensing fees dipping to about $1.58 billion.

As far as the second quarter is concerned, Oracle is deeply affected by currencies, and the strengthening dollar surely didn't help the company's bottomline. FBR analyst David Hilal says the dollar's 12 percent jump against the euro since September could cut revenue by as much as $300 million in its second quarter. But if the company cites the weakened dollar lately as a reason to raise guidance, that could give the company's outlook a bit more credence.

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I'm told that Oracle has also been engaged in some pretty heavy-duty cost-cutting, without having to institute a broad layoff. Oppenheimer's Brad Reback wrote to his clients that Oracle could shave as much as $700 million in expenses without laying off any workers. Still, with 85,000 employees, if Oracle does announce a workforce reduction, the analysts I'm talking to say it wouldn't be much of a surprise. More likely are cuts in travel budgets and a hiring freeze. Either way, cost-cutting certainly could help bolster the company's second quarter performance as well as guidance.

Bottomline is this: Experts anticipate a serious slowdown in PC, network hardware and enterprise software spending in 2009. That's not a surprise. Goldman Sachs says financial companies, a big Oracle customer base, could reduce budgets on average 20 percent next year. The strengthening dollar won't help Oracle either. But the company could still be better-positioned than rivals IBM [IBM 85.26 -0.58 (-0.68%) ] or SAP simply because of its licensing structure and diverse software offerings.

The company's in the midst of an additional $8 billion stock buyback program, which might come at a good time, considering shares are below their 50-day and 200-day moving averages of $16.87 and $19.71. Shares are down about 20 percent so far this year.

Some analysts I'm talking to believe that Oracle has been oversold, but is unlikely to see any meaningful break-out until the economy starts turning around. However, they also believe that Oracle will be among the first to benefit from an improving economy and is getting increasingly attractive, on a valuation basis at these levels. This should be an interesting conference call indeed.