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Oracle (ORCL) Gains on Q3 Earnings Beat, Revenues Miss

Zacks Equity Research

Oracle Corp.’s ORCL third-quarter fiscal 2016 adjusted earnings of 59 cents beat the Zacks Consensus Estimate of 58 cents. However, earnings declined 9.2% from 65 cents reported in the year-ago quarter. Adverse currency translations owing to the strengthening of the U.S. dollar weighed on the company’s financials in this quarter as well.

Following the results, shares rose over 4% in afterhours trading yesterday.

Revenues

Revenues were down 3% on a year-over-year basis to $9 billion and also fell short of the Zacks Consensus Estimate of $9.2 billion. However, on a constant currency basis, revenues inched up 1% year over year.

Total cloud and on-premise software revenues dropped 1% year over year to $7.1 billion, while excluding currency effects, it grew 3%. Total cloud revenues were up 40% (up 44% on constant currency basis) to $735 million while on-premise software revenues were down 4% (unchanged on currency basis) to $6.3 billion.

Total hardware revenues tanked 13% year over year (down 8% on constant currency) to $1.1 billion. Services revenues were also down 7% (down 2% on constant currency basis) to $793 million.

Cloud SaaS and PaaS revenues jumped 57% year over year (up 61% on constant currency) to $583 million. Cloud IaaS revenues decreased 2% (up 2% on constant currency) from the year-ago quarter to $152 million.

Oracle stated that SaaS and PaaS billings were up 32% year over year (up 77% in constant currency).  In the reported quarter, the company added 942 SaaS customers and about 250 customers went live on Fusion SaaS HCM and Fusion ERP.

Margins

Total operating expenses inched up 1% (up 4% on constant currency) from the year-ago quarter to nearly $6 billion.

Adjusted operating margin contracted 300 basis points (bps) year over year to 39.6%.

Liquidity

Oracle’s cash and marketable securities were $50.8 billion as of Feb 29, 2016, compared with $54.4 billion as of May 31, 2015.

Operating cash flow for the quarter was $14.1 billion while capital expenditures were $1.6 billion. Free cash flow in the quarter was $12.5 billion.

Oracle repurchased over 61 million shares for $2.2 billion. The company has also increased its share repurchase authorization by $10 billion.

Guidance

The company provided guidance for the fourth quarter of fiscal 2016 on a non-GAAP and on a constant currency basis. Oracle expects unfavorable currency translations to have a negative impact of 2% on revenues and 2 cents on earnings per share.

For the fourth quarter, total revenue is expected to be down 2% to up 1%. Non-GAAP earnings per share are expected in the range of 82 to 85 cents. SaaS and PaaS revenue is expected to grow between 57% and 61%. On premise software and cloud revenues are expected to increase in the range of 1% to 2%.

Our Take

Oracle has been witnessing strength in its SaaS, PaaS and Big Data divisions, which is encouraging. While the company already enjoys a leading position in the enterprise software and database management system (DBMS) software market, it has also been gaining ground on its cloud endeavors. We expect the company’s top line to benefit from the rapid adoption of engineered systems and cloud suites.

Over the last few months, the company has made significant advancements in the cloud business. These range from developing new innovative cloud services to supporting the company’s growing cloud initiatives by setting up a progressive technology campus in Austin, TX. Oracle unveiled its Oracle PartnerNetwork Cloud program, which has already been selected by a leading broadband communications access provider – Calix. It also introduced a new range of cloud services, specifically for hospitality and retail markets, which should become an important growth driver.

However, the company’s continuing transition from licensing, where revenues are recognized upfront, to a cloud subscription model, where it is realized over the years, will hurt its top line in the near term. In addition, strengthening of the U.S. dollar will continue to weigh on its financials. Also, stiff competition from the likes of Alphabet’s GOOGL Google, IBM IBM and Amazon.com, Inc.’s AMZN AWS remains a concern.

Currently, Oracle has a Zacks Rank #3 (Hold).

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