Oracle Corporation (NYSE:ORCL)’s recent acquisitions should make some sort of positive contribution, however, exactly how much of a contribution is unclear right now. Analysts at Sterne Agee believe the company will beat the top half of its earnings guidance.

Oracle

Sterne Agee analyst Robert Breza’s full report is below:

Investors will attach high importance to growth, and more important, want to see an acceleration in new license growth within Fusion Apps and Cloud revenue, following the acquisitions of Responsys and BlueKai. Revenue and its components will therefore be under the microscope. We expect improvements, which should encourage investors, especially combined with an improving IT spending environment. We expect results in the higher end of the guidance range and maintain our Neutral rating.

Expect Topping the Higher Half of Guidance Earnings

FY13/Q3 new software license and cloud software subscription revenue grew -2% y/y, setting up for the easiest year-on-year comparables, while FY13/Q4 had the second easiest comparables, creating an opportunity for accelerated growth in the second half. Based on our industry checks, we expect Software License Updates and Product Support combined with Hardware Systems to come in the higher half of management’s guidance, supporting revenue above consensus of $9.36 billion likely closer to $9.4-$9.45 billion. We expect some of that revenue upside to percolate to the bottom line, leading to $0.72 in EPS, at the high end of the range and consensus of $0.70. The comfortable cash flow levels should allow for further investments to drive future revenue growth.

Oracle Recent Acquisitions Contribution Unclear but Positive Medium Term

Oracle Corporation (NYSE:ORCL)’s two most recent acquisitions were cloud-based marketing companies: Responsys for $1.4 billion and acquired revenue of $194 million and BlueKai for an undisclosed amount. While it is difficult to estimate exactly how much revenue will be recognized given the integration rules, we believe these acquisitions add to the positive momentum and will have a positive impact short to medium term.

Capital Allocation

Oracle Corporation (NYSE:ORCL) pays an annualized dividend of $0.48 and repurchases shares in the open market on an annualized basis approaching $3B. Free cash flow was up over 14% y/y to $14.6B over the last twelve months, resulting in $39B in cash by the end of FY14Q2. We therefore believe that Oracle Corporation (NYSE:ORCL) will continue its long track record of returning capital to investors, with over $39B over the last 10 years paid in the form of buyback and dividends.

Valuation

Currently, Oracle Corporation (NYSE:ORCL) trades at a P/E ratio of 12.5x our FY2014 EPS estimate, which is a slight discount to the legacy software group mean multiple of 13.3x (excludes Adobe). Our $40 price target assumes that shares of Oracle Corporation (NYSE:ORCL) trade at a 13.5x multiple on our FY14 EPS of $2.96 estimate, in line with the legacy software group mean multiple and at a premium to other large cap technology peers of 12.4x. We believe an in-line multiple is justified given the low revenue growth profile of the company and could justify a higher multiple if the company can deliver upside to revenues.