The Zacks Analyst Blog Highlights: Oracle, Google, Apple, Microsoft and Automatic Data Processing

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Apr 05, 2012, 09:30 ET

CHICAGO, April 5, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Oracle (Nasdaq: ORCL), Google (Nasdaq: GOOG), Apple Inc. (Nasdaq: AAPL), Microsoft Corp. (Nasdaq: MSFT) and Automatic Data Processing (Nasdaq: ADP).

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Here are highlights from Wednesday's Analyst Blog:

Oracle-Google Dispute Reaches Court

Tech giants Oracle (Nasdaq: ORCL) and Google (Nasdaq: GOOG) are set to lock horns in a legal battle upon their failure to reach an amicable settlement. The first hearing pertaining to a couple of Java patent infringements is scheduled for April 16. U.S. Magistrate Judge Paul Grewal, who was supervising the settlement procedure for more than six months, cited irreconcilable differences between the two companies for the failure.

To date, the patent lawsuit has seen a number of ups and downs for both the companies. The dispute started when Oracle filed a lawsuit against Google alleging violation of several patents. The main conflict was regarding Google's Dalvik process virtualization machine ("VM"), which was developed using Java and serves as the backbone of the Android operating system.

Oracle claimed damages worth billions of dollars and appealed for the annihilation of all the infringed products. However, Google denied any infringement and argued that some files it copied from Java are insignificant as test files. Google also said that the copying was required for compatibility because there was not any other language it could use.

Oracle argued that Google infringed only the desirable parts and created many other application programming interfaces (API), incompatible for Android. As a result, many programs written in Java for other platforms were incompatible with Android, and many programs written for Android will not run on other Java platforms and devices.

Oracle also claimed that no court had found that the API for software like Java ineligible for copyright protection. Oracle further argued that program names, even subroutine names, should have the same copyright protection as the underlying code. Oracle also stated that Google's actions have made it impossible for the company to enter the mobile market in the future, primarily due to the strong competition from android.

In such a scenario, Google requested the US Patent and Trademark Office (PTO) to re-examine the patents that Oracle alleged to be in violation. Google received some favorable judgment, which forced Oracle to tone down its patent and copyright violation claims to 2 from at least 6 filed earlier.

The battle tilted somewhat in favor of Oracle, when the company got hold of an e-mail sent by a Google executive to the head of Google's Android division, which showed that Google recognized that it needed a license for Java. Google asked the judge to withdraw the e-mail, saying it was supposed to remain confidential and that Oracle wrongly revealed it.

The judge not only overruled Google's request but also dismissed Google's claim that its advertising revenue was not related to the value of Android and should therefore not be a part of Oracle's damages. Google's argument centered on the fact that it offers Android for free and so it's advertising revenue should not be used to pay for damages.

However, Oracle's upper hand did not last long, as the US district Judge agreed with Google's argument that the company's $6.1 billion damage claims were unwarranted. The Judge noted that the "starting point" of the damages should be approximately $100.0 million, depending on various factors. Oracle initially lowered its damage claims to $2.0 billion and after much dilly-dallying submitted a revised maximum damage claim of $226.0 million, which included $57.1 million for patent violations and $169.0 million related to copyright.

However, Google also found the revised amount too high and proposed to pay approximately $2.8 million for the 2 patents covering the period through 2011. Google also proposed to pay Oracle 0.5% of future Android revenue on one patent, which will expire on December 2012 and 0.015% on the second patent till its expires on April 2018. Oracle rejected the offer citing it to be undervalued and thus closed all the routes for further negotiations.

Recently, Google has asked the court to shorten the case duration from its currently scheduled eight weeks. Google also said that it would prefer to appear in front of U.S. Judge William Alsup instead of a Jury. Since, both the companies have already been reprimanded for wasting the court's time and jury trials tend to linger long; we would not be surprised if the court grants Google's appeal.

Although it is very difficult to point out an outright winner, we believe that Google has nudged ahead of Oracle. Oracle's backtracking in terms of the number of patent violations allegations and also the much lower damage claims somewhat reflected Oracle's apprehension, in our view.

However, an Oracle win will have far-reaching consequences for companies such as Google, which depends heavily on open source. Interoperability within different software will be practically impossible without the clear permission and royalty payments to the copyright holders. On the other hand, it would benefit companies like Oracle, Apple Inc. (Nasdaq: AAPL) and Microsoft Corp. (Nasdaq: MSFT) who are extremely zealous in protecting their copyrights.

We have a Neutral recommendation on both Oracle and Google over the long term. Currently, Oracle has a Zacks #2 Rank, which implies a Buy rating in the near term. Google has a Zacks #3 Rank, which implies a Hold rating in the near term.

ADP Jobs Report Comes In-Line

All evidence pointing towards an improving economy should be good news for stocks. But, as we saw with the market's reaction on Tuesday to the minutes of the Fed's last meeting, favorable movement on the economy's front also means less support from the Fed going forward.

This morning's strong labor market reading from payroll processorAutomatic Data Processing (Nasdaq: ADP) further confirms the economy's strengthening fundamentals. Whether investors perceive this as good news or bad will depend on whether they think stocks need a healthier economy that can stand on its own or permanent crutches from the Central Bank.

I strongly believe that the prospect of no more Fed support is a net bullish development for the market and the economy, but this thinking will likely take some time to fully seep in. We also have fresh jitters about Europe this morning following a weak Spanish government bond auction, but the overall driver of today's market action will be a reflection of the theme outlined above. A total of 209K private sector jobs were in created in March, according to ADP, matching expectations. The jobs numbers for February and January were revised upwards to 230K (from 216K) and 182K (from 173K). The gains were broad-based across industries and business sizes, with manufacturing adding 23K and the broader goods producing sector generating 45K jobs.

As would be expected at this stage of the cycle, the services sector added most of the jobs, with small businesses accounting for the bulk of the hiring. Interestingly, weather did not appear to have been much of a factor as a number of analysts had been expecting, confirming that the labor market gains of the last few months reflect underlying improvement in the economy and not some temporary helping hand from Mother Nature.

The ADP tally sets the tone for Friday's jobs report from the government's Bureau of Labor Statistics (BLS), which is expected to show headline job gains of around 200K. The ADP numbers have come below the corresponding BLS numbers over the last three months. February's 230K tally of jobs (revised upwards today from 216K) was preceded by 182K (originally reported at 173K) in January and 267K in December.

The corresponding BLS tally of private sector jobs were 233K in February and 285K in January and 234K in December. Going by this trend, we will not only get an above 200K print from the BLS on Friday, but will most likely see positive revisions to the February and January numbers as well.

Please keep in mind that private payrolls in the BLS report have been revised upwards in each of the last nine months, likely highlighting that official BLS numbers are under-counting the full extent of labor market improvement. The unemployment rate will also likely come down from February's 8.3% level to the bottom of the Fed's 8.2% to 8.5% range for the year.

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