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Oracle (ORCL) Q2 Earnings Beat Estimates, Revenues In Line

Oracle Corporation ORCL reported modest second-quarter fiscal 2019 results. Non-GAAP earnings of 80 cents per share surpassed the Zacks Consensus Estimate of 78 cents. Revenues of $9.562 billion were almost in line with the Zacks Consensus Estimate of $9.535 billion.

Earnings increased approximately 16% from the year-ago quarter (up 19% in cc). Further, revenues were almost flat year over year and increased 2% in cc. This was towards the higher range of management’s guidance of 0-2%.

Structural Changes

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

In first-quarter fiscal 2019, Oracle launched a bring-your-own-license (BYOL) program which enables customers to shift their existing on-premise licenses to the Oracle Cloud. In doing so, Oracle 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 its Cloud SaaS, Cloud PaaS and IaaS along with its software license updates and product support into Cloud services and license support.

Share Price Movement

In the past year, the company’s shares have declined 4.4%, against the industry’s growth of 15.6%.

The share price decrease can be attributed to the new accounting standard adopted by the company and structural changes which it has undergone in the reported quarter. Oracle no longer intends to break out its cloud revenues and does not provide any guidance on SaaS, Cloud PaaS and IaaS. This move is likely to aggravate investor concern regarding the company's outlook.

The share price movement was also impacted by lower-than-expected hardware and services revenues during the second quarter.

Cloud Drove the Top Line

Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud services and license support revenues (69% of total revenues) for the quarter advanced 3% (5% in constant currency) to $6.64 billion.

However, total cloud license and on-premise license decreased 9% year over year (6% in constant currency) to $1.22 billion.

Management announced that Fusion ERP and Fusion HCM is more than $2.6 billion in the 12 months period. Fusion ERP was up 44% for the full year. NetSuite ERP revenue increased 25%.

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

The company’s tech ecosystem is $21 billion in the past 12 months. BYOL remains strong fueled by new database license and support revenues, both of which were up low-single digits.

Total hardware revenues were down 5% (3% in cc) year over year and came in at $$891 million. Services revenues decreased 5% (2% in cc) to $817 million.

Operating Details

Non-GAAP operating expenses, as percentage of revenues, increased 70 basis points (bps) to 57.3%.

As a result, non-GAAP operating income during the reported quarter came in at $4.08 billion, down 2% from last year. Non-GAAP operating margin was flat year over year and came in at 43%.

Balance Sheet & Cash Flow

As of Nov 30, 2018, Oracle had cash & cash equivalents and marketable securities of $49.39 billion, down from $60.1 billion sequentially. Operating cash flow for the trailing four quarters was $15.2 billion, while free cash flow was $13.8 billion.

Share Repurchases & Dividends Continue

Oracle repurchased around 203 million shares worth $10 billion during the reported quarter. Over the last 12 months, the company repurchased 602 million shares. The company also declared a quarterly dividend of 19 cents per share, payable on Jan 30, 2019.

Guidance

For the third quarter of 2019, total revenues are anticipated to grow in the range of 2-4% in cc.

Non-GAAP earnings are anticipated to be between 83 cents and 85 cents for the third quarter, while in constant currency non-GAAP earnings is expected to be in the range of 86 cents and 88 cents. The Zacks Consensus Estimate is pegged at 85 cents per share.

Zacks Rank & Key Picks

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

Some better-ranked stocks in the broader technology sector are Upland Software UPLD, Marvell Technology Group Ltd. MRVL and Twitter, Inc. TWTR, all flaunting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Upland Software, Marvell and Twitter is currently pegged at 20%, 9.4% and 22.1%, respectively.

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