ORCL: Macquarie Ponders Risk in Large Deal Surge

Macquarie Research�s Brad Zelnick, reviewing the�10-Q filing�for�Oracle�(ORCL), filed on Friday, reiterates a Neutral rating on shares, and $35 price target, writing with some concern that last quarter reflected �a significant increase in large deal activity,� which is good for �validating Oracle�s relevance,� but also worrisome because it presents �incremental risk.�

Fiscal second-quarter revenue for oracle from transactions greater than $3 million rose by 56% year over year, Writes Zelnick, way higher than the 17% rise in total license revenue and �cloud� software revenue.

Zelnick notes that it�s possible the shift in Oracle�s revenue from license to cloud-based software, and that the company�s string of acquisitions, is taking away some of what would have been smaller deal wins as normal license revenue:

While it�s intuitive for deal sizes to increase over time as Oracle acquires companies and has more to sell, there are offsetting counterarguments: 1) in acquiring companies, it would stand to reason that acquired customers at least initially may purchase a smaller subset of what Oracle offers and perhaps cloud offerings (not licenses); 2) Another argument is that licenses are being replaced over time by cloud subscriptions, which appear to be excluded from this metric. Constructively speaking, one can argue that engineered systems, private clouds, and consolidation are serving to grow Oracle�s largest customers. But on balance, these arguments culminated in last year�s large deal mix finishing similar to the prior year after being askew in 1H.

It�s preferable for Oracle to have �a consistent mix of deal sizes,� he writes, �but we appreciate reality is imperfect.�

�The risks of large deals are that they tend to be lumpier, more difficult to comp over time, and can skew seasonal trends.�

It�s possible there was a �deal surge� that produced the outsized large-deal growth, he concedes.

�Might there have been customer desire to spend ahead of the fiscal cliff?�

�We have no tangible evidence of this, but as with the accelerated dividend recently declared, perhaps Oracle and its customers are thinking ahead.�

To achieve the projected 8% mid-point of the company�s license growth projection for the current fiscal Q3, Zelnick offers the following table of �sensitivity analysis�:

His conclusion is cautious: �We maintain the environment is difficult and believe the large deal strength in F2Q may imply risk in 2H.�

Zelnick projects revenue of $38.33 billion and $2.70 per share in adjusted profit for the full year, which is in line with the Street�s average estimate.

Oracle shares today closed down 15 cents, or 0.4%, at $33.61.