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Thriving Oracle tries to match analysts' great expectations

An exterior view of Oracle Corp. headquarters is shown in a Redwood City, Calif.


Oracle Corp. will be facing high expectations when it reports earnings on Tuesday. That's the price of being a market leader.

The Redwood Shores, Calif.-based technology giant casts an imposing shadow over the software industry, with database products that dominate offerings from the likes of Microsoft, IBM, Hewlett-Packard and SAP. Yet it's still growing at rates that many start-up firms would envy.

It has reported double-digit revenue increases for the past four quarters, while its net income has risen for three straight quarters. In its last quarter, it achieved record revenue of $10.8-billion (U.S.), an increase of 12 per cent from the previous year. Operating income was $5.2-billion – an increase of 19 per cent from last year – while its operating margin grew by 48 per cent.

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With an anemic U.S. economy and a looming financial disaster in Europe, most companies are bracing for a slowdown. But not Oracle. Analysts expect it to report second-quarter earnings of 48 cents a share, up nine cents from the preceding quarter. It would seem that stellar performance from Oracle is now par for the course.

Thirty-six out of 44 analysts following the stock rate it as a buy. However, they have recently expressed more caution toward the stock and the number of buy ratings has dropped slightly over the past three months.

Could this be due to gathering headwinds in 2012? Not according to Oracle. At a conference in October, the company argued that Microsoft, its biggest competitor, "isn't doing anything" in the database market and that Oracle's innovation lead in this core business is growing.

Looking at the numbers, it's hard to find fault. Oracle clearly leads in this space, with a 48 per cent market share, compared to 21 per cent for IBM and 18 per cent for Microsoft.

However, Microsoft's impending launch of its new SQL Server 2012 database, while far from a game changer, is evidence that Oracle's dominance in the market should not be taken for granted.

Karl Keirstead, an analyst with BMO Capital Markets, says SQL Server 2008 was a big step forward and upgrades in SQL Server 2012 will go even further toward narrowing the gap between it and Oracle's software. Other research shows that while Oracle's market share continues to climb, Microsoft is gaining ground at the expense of IBM.

"In our view, Oracle's statement that Microsoft 'is doing nothing' in the database market is inaccurate and we believe that Microsoft gets too little credit for its SQL Server success," Mr. Keirstead says.

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Mind you, Oracle's edge in innovation is not being threatened by Microsoft or anyone else, he concedes. Customers tell him "the [Oracle]license requests keep rolling in." Mr. Keirstead sees nothing to suggest that overall database license growth is under pressure, and his confidence that companies will continue to spend on data management software supports his "outperform" rating on Oracle.

The company's recent $1.5-billion acquisition of cloud-based customer-service software provider RightNow should only add to its advantage in 2012. An RBC Capital Markets report notes that RightNow appears to be a good fit with Oracle's suite of customer service offerings.

Yet despite its enthusiasm for the deal, RBC rates the stock as only "sector perform." Oracle's biggest challenge right now is to live up to the sky-high expectations that have grown up around it.

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About the Author
Streetwise editor

Jody White is the web editor for Streetwise. He previously worked as a senior editor at Canadian Business Online and has written for MoneySense Magazine, Maclean's, the National Post and other national publications. More

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