Oracle's boom time is not likely to continue as the U.S. recession deepens. The business software giant may not be ready to put jobs on the chopping block, but it will probably curtail expenses sharply.
Business software maker Oracle (Nasdaq: ORCL) is scheduled to report its fiscal second-quarter results after the stock market closes Thursday.
The following is a summary of key developments and analyst opinion related to the period.
Overview: Oracle has been on a roll for several years as it snapped up dozens of its smaller rivals, but the Redwood Shores-based company will be hard pressed to keep the momentum going as more corporate customers curtail their spending on technology to weather the recession.
Analysts already have lowered their fiscal second-quarter estimates to below the target set by Oracle's management three months ago and are bracing for a cautious outlook for the rest of the fiscal year ending in May.
The big question now is whether Oracle will rein in its expenses to help offset the anticipated weakness in its sales. Many other technology companies already have drawn up plans to prune their payrolls, so it won't be a shock if Oracle trims its payroll of about 85,000 employees worldwide.
Most analysts, though, seem to think Oracle will start off by curbing travel expenses and other discretionary items before resorting to its first mass layoffs since the dot-com bust of 2001 shriveled its software sales.
Oracle eliminated about 2,300 jobs between May 2001 and May 2003, representing a 5 percent reduction from a much smaller work force at that time. If Oracle were to impose layoffs on a similar scale in this recession, it would translate into about 4,300 fewer jobs.
As usual, investors are likely to focus on Oracle's sales of new software licenses -- a key benchmark because those deals uncork a stream of future revenue from product maintenance and upgrades.
Back in September, Oracle forecast its new software sales during the second quarter would rise by 2 percent to 12 percent. Some analysts think Oracle may have landed a large software deal that may have helped the company fall within that range, but management isn't expected to be as optimistic in its forecast for the current quarter ending in February
By the Numbers: Analysts, on average, expect Oracle to report earnings of 34 US cents per share on revenue of $5.86 billion. The earnings estimates exclude expenses for employee stock compensation and acquisitions. Oracle's management projected adjusted earnings of 35 cents or 36 cents per share.
Analyst Take: Even though analysts have already lowered their forecasts, Brad Reback of Oppenehimer & Co. is advising investors to be prepared for a letdown when the results and third-quarter outlook are released.
"It is difficult to envision a scenario where the company's ability to close deals in late November was not negatively impacted" by the deepening recession, Reback wrote in a recent note to clients.
Stronger Dollar Doesn't Help
As if the economy isn't challenging enough, the strengthening dollar also is taking a toll on Oracle's international sales. Noting that the dollar has gained 12 percent against the euro since mid-September, analyst David Hilal of Friedman, Billings, Ramsey & Co. thinks Oracle will lose about $300 million more in revenue from adverse currency fluctuations than management anticipated in September.
Both Reback and Hilal expect Oracle to cut its costs to cope with the downturn.
Reback believes Oracle has enough wiggle room to lower its annual expenses by about $700 million without resorting to layoffs. This assumption is based on projected fiscal 2009 expenses of nearly $14 billion, or about $160,000 per employee. Oracle's expenses have averaged about $153,000 per employee during the past 12 years, Reback said.
What's Ahead: Oracle Chief Executive Larry Ellison has indicated that he may try to take advantage of the recession's fallout to buy even more rivals at bargain prices. The company already has spent more than $35 billion on takeovers completed during the past four years.
Stock Performance: Oracle shares dropped by 27 percent during its fiscal second quarter and are down by about the same amount for the year.
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