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Oracle’s Mixed Results - Is It a Buy?

Oracle (ORCL)'s latest earnings release had two big positives; 25% growth in cloud computing and a turnaround in hardware business with 6.6% growth. However, Oracle’s total revenue growth continues to remain below 5% level as the company faces tough competition in its key areas.

In its quarterly results announced on March 18, the company’s revenue increased 3.9% from the same quarter last year to $9.31 billion while net income rose 2.4% to $2.57 billion, or $0.56 per share. This translated into adjusted earnings of $0.68 per share. On the other hand, analysts were expecting earnings of $0.70 per share from revenues of $9.36 billion, as per data compiled by Bloomberg.

In the earnings release, the biggest positive was Oracle’s strong performance in cloud computing. The company’s revenues from software licenses and cloud software subscriptions rose 3.6% to $2.42 billion. Cloud subscriptions came in at $292 million, which points towards a 25% growth in constant currency terms.

Moreover, Oracle has significantly improved its bookings growth rate in the cloud business from 35% in the second quarter to 60% in the third quarter. During the conference call, Oracle’s management also said that their bookings growth rate is “considerably higher” than that of its biggest competitor, Salesforce.com (CRM).

Similarly, in Human Capital Management, Oracle added 250 customers, which Oracle said is “four to five times” better than the number reported by Workday (WDAY).

Clearly, Oracle is growing quickly in the cloud services business. This growth was partly due to the acquisitions, like the purchase of Responsys, and partnership with competitors such as Microsoft (MSFT) and Salesforce.

The second positive in the earnings release was the 6.6% growth in the struggling hardware business to $1.3 billion. This was driven by 8% growth in hardware systems products and a 6% growth in hardware systems. Since 2010, this was the first time that Oracle reported growth of hardware system products.

This was a big turnaround as in the corresponding quarter of fiscal 2013 and fiscal 2012, the revenues from hardware systems fell by 22% and 16%, respectively.

Oracle also generates a lot of cash. On a trailing basis, the company’s operating cash flow rose 10% to $15 billion. The company has a healthy free cash flow yield of 8%.

Moreover, Oracle’s earnings’ estimates for the current quarter should please investors. In the fourth quarter, Oracle is eying earnings of between $0.92 and $0.99 per share from revenues of between $11.3 billion and $11.7 billion, which is in-line with analysts’ estimates.

Despite the positives, Oracle continues to struggle with growth. In the last ten quarters, Oracle has not reported revenue growth of more than 5%. Therefore, over the last couple of years, the company’s growth has been modest, at best. Over the last two years, Oracle’s trailing revenues have remained between $36.9 billion and $37.9 billion.

This lack of growth is the direct result of tough competition. Oracle is the global leader when it comes to database software but in this industry, the company is facing tough competition from Microsoft. When it comes to business applications, Oracle has to compete against SAP AG (SAP), the biggest player in this market.

Oracle has shown strong growth in cloud computing, outperforming some of its competitors, which is encouraging. But Oracle is a late entrant in this industry which is dominated by companies like Salesforce, Workday and Amazon (AMZN). Moreover, with the increasing competition in cloud computing, the margins have been shrinking.

Conclusion

Oracle has clearly shown improvements in cloud computing and hardware business. Overall, its revenue growth remains modest at best as it continues to face tough competition in its key operating areas: data services, hardware and cloud computing. In short, Oracle has shown strong growth in some of its key areas where it is eyeing its long-term future, but its results were below market’s expectations. Therefore, the results were a mixed bag.

Oracle’s shares have not witnessed any meaningful increase this year. The shares are currently trading 12 times Oracle’s forward earnings estimates for the next four quarters and appear reasonably valued. Therefore, they are not a buy. Historically, over the last two years, the company’s shares have remained between 10.5 times and 12.5 times its forward earnings estimates.

Moreover, a modified DCF model, which includes analysts’ earnings estimates for the next two years, followed by an annual earnings growth rate of 7%, dividend growth rate of 12% and discount rate of 9% would give an estimated share price of $38.19, which is in line with the current price.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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