Oracle (ORCL) Beats On Q4 Earnings & Revenues, Stock Up

Oracle Corporation (NYSE:ORCL) delivered strong fourth-quarter 2017 results. Adjusted earnings (including stock-based compensation) of 82 cents per share and revenues of $10.94 billion comfortably beat the Zacks Consensus Estimate of 73 cents and $10.48 billion, respectively.

Adjusted earnings (excluding stock-based compensation) increased 9.9% to 89 cents per share, which was better than the company’s guided range of 78–82 cents. Unfavorable foreign currency impacted earnings by a penny.

Revenue growth of 3.3% (4% in constant currency) was also better-than management’s guided range of (1%) to 2%. Adverse currency movements hurt total revenue by 1% in the quarter.

Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud revenue (12.9% of total revenue) advanced 64.1% (60% in constant currency) to $1.41 billion in the reported quarter. Moreover, total cloud and on-premise software revenue increased 7% in constant currency to $8.93 billion in the reported quarter.

In fiscal 2017, total revenue grew 3% in constant currency to almost $37.90 billion. Total cloud revenue soared 68% in constant currency to $4.74 billion. Software and cloud revenues totaled almost $30.40 billion, growing 6% in constant currency with $24 billion or 79% of that being recurring revenue, up from 75% in last year.

Adjusted earnings increased 6% in constant currency to $2.74 in fiscal 2017.

Shares were up more than 10% in after-hour trading following the results. We note that Oracle’s return of 31.2% is better than the S&P 500’s gain of 9.2% on a year-to-date basis.

Cloud Drove Solid Top-Line

Cloud SaaS revenues advanced a significant 74.7% (76% in constant currency) year over year to $1.00 billion. Cloud PaaS & IaaS revenues surged 42.4% (45% in constant currency) to $403 million.

Gross deferred revenue improved 63% to more than $2.4 billion. Cloud billings grew 42% in the quarter.

Strong cloud results fully mitigated weak on-premise software revenues (68.8% of total revenue), which declined 0.8% (flat at constant currency) to $7.52 billion. ERP and Fusion HCM revenues gained 156% and 96%, respectively. Management noted that the growth rate at Fusion HCM was more than twice the growth rate of Workday (NYSE:WDAY) . Database as a Service was up 62% from the year-ago quarter.

Oracle sold $855 million of new annually recurring cloud revenue (ARR) in reported quarter and was $2.1 billion in fiscal 2017. While SaaS bookings were $486 million, PaaS and IaaS bookings $369 million in the quarter. Management noted that the cloud ARR is actually better than salesforce.com (NYSE:CRM) for the second consecutive year.

Software updates and product support revenues were almost $4.90 billion, up 3% in constant-currency. This reflected the continued high attach and renewal rates that showed the stability at the company’s installed base of on-premise customers.

Total hardware revenue slipped 13.2% (down 12% at constant currency) year over year to $1.11 billion.

Services revenues increased 2.5% (up 4% at constant currency) to $894 million.

Operating Details

SaaS gross margin was 65% significantly higher than 54% reported in the year-ago quarter. PaaS and IaaS gross margin was 47%, down 700 basis points (bps) from the year-ago quarter due to continued investments.

Operating expenses (including stock-based compensation) as percentage of revenues decreased 50 basis points (bps) to 57% in the reported quarter. Adjusted operating expenses as percentage of revenues decreased 90 bps to 54.2%.

The decrease can primarily be attributed to lower hardware and sales & marketing expenses, which were down 140 bps and 60 bps, respectively.

As a result, adjusted operating margin (including stock-based compensation) expanded 30 bps from the year-ago quarter to 42.7%. Adjusted operating margin (excluding all one-time items) expanded almost 90 bps to 45.8%.

Balance Sheet & Cash Flow Improves

As of May 31, 2017, Oracle had cash & cash equivalents and marketable securities of $66.08 billion. Operating cash flow was $14.1 billion, up $673 million sequentially. Free cash flow increased $328 million to $12.1 billion.

Share Repurchase & Dividend Continues

Oracle bought back 11 million shares for a total of $500 million in the fourth quarter. In the last 12 months, the company repurchased 86 million shares for a total of 3.5 billion and paid out dividends of $2.6 billion.

Guidance

For first-quarter fiscal 2018, total revenue is anticipated to grow in the range of 4–6%. Cloud revenues including SaaS, PaaS and IaaS are expected to grow between 48% and 52%.

Earnings are anticipated to be between 59 cents and 61 cents for the quarter, with a couple of cents impact from adverse currency headwind.

For fiscal 2018, Oracle expects cloud revenues to materially surpass new software license revenues. Moreover, cloud gross margin is expected to expand and operating income is also anticipated to accelerate. The company projects double-digit earnings growth.

Management expects cloud capital expenditure spending to be about $1 billion in fiscal 2017, roughly equivalent to fiscal 2017 level.

ARR is projected to be better than fiscal 2017. Further, management anticipates SaaS gross margin to eventually rise to 80% in the long haul.

Our Take

Oracle continues to gain traction on its cloud endeavors. Specifically, the company’s offerings in SaaS and PaaS have gained significant momentum in the past few quarters, which improves competitive position against salesforce.com and Workday. Further, the continuing transition to cloud from on-premise as reflected by the AT&T (NYSE:T) deal is a key catalyst.

We believe the company’s growing cloud market share will continue to drive top-line growth for the foreseeable future. Moreover, Oracle continues to win new customers in HCM, ERP and CX.

However, higher investments on IaaS will affect gross margin expansion in the near-term. Further, a strong U.S. dollar remains a headwind.

Zacks Rank

Currently, Oracle carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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