RBC Capital Markets, LLC analysts Matthew Hedberg, Dan Bergstrom, and Matthew Swanson investigate Oracle Corporation (NYSE:ORCL) in light of their 3Q14 results.

Oracle

Oracle 3Q14 results

Our view: We’re anticipating an in-line third quarter with both revenue and EPS near the mid-point of guidance and expect little upside to shares, which are near a 13-year high. Aside from headline results, highlights of the call will likely revolve around new license sales, cloud applications and any macro-economic read through for the sector. Maintain Sector Perform rating and $35 target.

Key points

RBC perspective on Q3’14 results Looking to continue momentum from a solid Q2’14, which saw increased cloud application bookings, an improving macro environment and a stabilizing hardware business, we anticipate Oracle Corporation (NYSE:ORCL) to report an in-line quarter on 3/18 but expect little upside to shares, which are near a 13-year high. We are looking for new software license sales of $2,460M vs. consensus of $2,474M, or an increase of 5.2% y/y vs. 6.0% at midpoint of guidance and against a -1.5% comp y/y. Based on checks with partners, results are likely  to be highlighted by solid database and more mixed application sales. We are looking for hardware revenue of $690M, inline with consensus, which would reflect the first quarter of growth since the acquisition, and should be viewed as a positive. Another area worth watching will be cloud sales, which have been at the $1B run-rate for three quarters now, though growth has remained relatively flat on a q/q basis over that time period. Net/net, we believe Oracle Corporation (NYSE:ORCL) will continue to show solid results but we remain more constrained on valuation as the stock is currently trading at 12.5x CY’14E EPS, which is in line with the stock’s average multiple of 12.5x over the last five years and large-cap peers at 12.6x. We maintain our Sector Perform rating and $35 price target, which assumes a 11.6x multiple that is a slight discount to peers and the stock’s historical average.

Guidance will be key

The key to the quarter will be Oracle Corporation (NYSE:ORCL)’s Q4’14 outlook. Oracle will be one of the first companies to report results for the first part of CY’14, and depending on the macro outlook, we anticipate Oracle Corporation (NYSE:ORCL) to remain conservative in guidance. Q4’14 faces easier compares, similar to Q3’14, with new license growth of only 0.7% in Q4’13.

Other keys to the call

In addition to headline Q3’14 results and guidance summarized above and in more detail within our cheat sheet on page 3, the keys to the Oracle Corporation (NYSE:ORCL) conference call should include: 1) performance of Fusion and its Exa line of products, 2) growth in cloud business, which grew bookings 35% last quarter, 3) expectations for hardware after a projected return to growth this quarter, 4) the ability to return to peak margins and 5) sales force productivity.