ORCL: Oracle Earnings - The Word of the Day is “Linearity”

By William Trent, CFA of Stock Market Beat

As we noted this weekend, Oracle Corp. (ORCL) is reporting earnings after the close tonight. And analysts are feeling more optimistic about the numbers, according to a Bloomberg article:

After delays in locking up contracts cut growth in the second quarter, Oracle managed to close big orders just before the period ended Feb. 28, said analysts including UBS AG’s Heather Bellini in New York, Institutional Investor’s top-ranked software analyst.”Two weeks before the quarter closed, people thought they were going to miss,’’ she said. “The quarter will be better than people thought it was. When you talk to Oracle salespeople they tell you their pipeline is huge.’’

Leaving aside the fact that we’ve never heard a salesperson descibe their pipeline as anything other than huge (they are salespeople, after all) the thesis nonetheless is in line with our prediction that “acquisitions will result in upside to estimates though organic growth may disappoint.” We aren’t particularly impressed by last-minute order closings, as we worry the company may be offering too good of a deal just to close on the sale before the quarterly reporting deadline. Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition would describe it as an aggressive revenue recognition practice. Furthermore, it isn’t the first time Oracle has relied on last-minute sales to meet numbers. In fact, they appear to have done it just last quarter.

So, if you listen to the conference call, listen particularly closely when anyone mentions the word “linearity.” It is the analyst code word for “stuffing the channel.” If the quarter was linear, each month would have roughly the same level of sales. Since software companies typically have a strong finish, they are said to have “back-end linearity.” The last month of the quarter is the strongest. If Oracle says anything like “linearity was more back-ended than normal,” look out. Analysts would interpret that as a potential revenue concern.

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