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Oracle (ORCL) Up 2% Since Last Earnings Report: Can It Continue?

Zacks Equity Research

It has been about a month since the last earnings report for Oracle (ORCL). Shares have added about 2% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Oracle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Oracle Earnings & Revenues Tops Estimates in Q4

Oracle delivered fourth-quarter fiscal 2019 non-GAAP earnings of $1.16 per share, which surpassed the Zacks Consensus Estimate of $1.07 per share. Revenues of $11.139 billion also outpaced the Zacks Consensus Estimate of $10.945 billion.

The bottom line increased approximately 23% from the year-ago quarter (up 27% in cc). Further, the top line improved 1% year over year and 4% in cc. This was above the higher range of management’s guidance of 1-3% in cc.

Structural Changes

The company adopted a new Accounting Standards Codification (ASC) 606, using the full retrospective method in the fiscal fourth quarter.

In first-quarter fiscal 2019, Oracle launched a bring-your-own-license (BYOL) program, which enabled customers to shift their existing on-premise licenses to the Oracle Cloud. In doing so, the company claims that licenses covered by the BYOL program can neither be defined as on-premise nor as cloud.

Consequently, the company started reporting its new software licenses under its new Cloud license and on-premise license segment. Further, the company merged Cloud SaaS, Cloud PaaS and IaaS, and software license updates and product support into Cloud services and license support.

Quarter in Detail

Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud services and license support revenues (61% of total revenues) for the reported quarter was flat year over year (up 3% in constant currency) at $6.8 billion.

Further, total cloud license and on-premise license increased 12% year over year (15% in constant currency) to $2.52 billion.

Management announced that Fusion ERP and Fusion HCM together is more than $2.9 billion annually. Fusion ERP was up 44% for the year. NetSuite ERP revenues increased 32%.

Further, the next-generation autonomous database launched by Oracle, which is supported by machine learning, is now available. This is a key catalyst for the company.

Oracle is also focusing on strengthening software portfolio with robust machine learning (ML) and AI capabilities. The company recently announced new functionalities to its Enterprise Performance Management (EPM) and Enterprise Resource Planning (ERP) cloud-based offerings.

The company also extended functionality of its Human Capital Management (HCM) cloud platform to provide engaging employee and manager experience with smart Digital Assistants and enhanced HR Help Desk.

Management believes that the new database will improve Oracle’s competitive position in the cloud against Amazon Web Services (AWS).

Total hardware revenues were $994 million, down 11% (8% in cc) year over year. Revenues for Services decreased 7% and 4% in cc to $823 million.

Operating Details

Non-GAAP operating expenses, as a percentage of revenues, contracted 110 bps to 52.8%.

As a result, non-GAAP operating income during the reported quarter was $5.26 billion, up 4% from last year (7% in cc). Non-GAAP operating margin expanded 100 bps year over year and came in at 47%.

Balance Sheet & Cash Flow

As of May 31, 2019, Oracle had cash & cash equivalents, and marketable securities of $37.83 billion, down from $40.03 billion sequentially. Operating cash flow for 12 months ended May 31, 2019 was $14.55 billion while free cash flow was $12.9 billion.

Share Repurchases & Dividends Continue

Oracle repurchased around 112 million shares worth $6 billion during the reported quarter. Over the last 12 months, the company repurchased 734 million shares worth $36 billion. It also increased the quarterly dividend to 24 cents per share. Over the last 12 months, the company paid dividends worth 2.9 billion.

Guidance

For the first quarter of 2020, total revenues are anticipated to grow 1-3% in cc. In dollar terms total revenues is expected to grow 0-2%.

Non-GAAP earnings are anticipated to be 80-82 cents per share for the first quarter while non-GAAP earnings are expected to be 81-83 cents in cc.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Oracle has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Oracle has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.



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