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Oracle Misses on Q1 Earnings, Announces Executive Change

Oracle Corp. (ORCL) reported disappointing first-quarter fiscal 2015 results. Earnings of 59 cents (including stock-based compensation but excluding other non-recurring items and related tax effect) missed the Zacks Consensus Estimate by a penny. Revenues also missed the Zacks Consensus Estimate of $8.78 billion for the third consecutive quarter.

Revenues

Revenues increased 2.6% year over year to $8.60 billion in the reported quarter. The year-over-year growth was slightly below the lower-end of management’s guided range of 3–5%. Software and cloud revenues increased 6% year over year to $6.6 billion, in line with the lower-end of management’s guided range of 6–8%.

Software revenues (76.5% of revenues) increased 6.1% year over year to $6.58 billion, primarily driven by 6.7% increase in software license update and product support revenues. New software licenses declined 2.1% on a year-over-year basis.

Cloud SaaS and PaaS revenues jumped 32% year over year to $339 million. Cloud IaaS revenues surged 26.6% from the year-ago quarter to $138 million. All the three segments are approaching $2.0 billion run rate.

Cloud bookings jumped 54% in the quarter. In cloud, Oracle won 500 new cloud customers during the quarter. The company added 170 customers who adopted Human Capital Solution (:HCM). Fusion overall had triple-digit bookings and revenue growth. The company added nearly 200 net new Fusion customers.

Hardware revenues of $1.17 billion decreased 8% on a year-over-year basis. The decline was primarily attributed to 13.6% and 1.5% year-over-year growth in hardware systems product and hardware systems support revenues, respectively.

Engineered systems (Exadata, Exalogic, Exalytics, Big Data Appliance and SPARC SuperCluster) grew in double digits in the quarter and now accounts for approximately one-third of hardware product revenues. The company shipped its 10,000th engineered system in the first quarter.

Services revenues declined 7% year over year to $855 million in the reported quarter.

Geographically, the Americas increased 2.3% year over year to $4.62 billion. Europe, Middle East and Africa (:EMEA) increased 6.2% from the year-ago quarter to $2.59 billion. Asia Pacific declined 2% year over year to $1.39 billion.

Margins

Total operating expenses as a percentage of revenues (excluding one-time items) increased 40 basis points (bps) from the year-ago quarter to 58.1%. Sales & marketing (S&M), research & development (R&D) and Services jointly incurred 74.6% of the operating expenses during the quarter.

S&M expense increased 50 bps on a year-over-year basis. The year-over-year increase in S&M expense reflects Oracle’s growing sales personnel base. R&D expense increased 70 bps from the year-ago quarter. However, services as a percentage of revenues declined 60 bps from the year-ago quarter.

Operating margin (including stock-based compensation but excluding one-time items) contracted 40 bps year over year to 41.9%, primarily due to higher-than-expected decline in hardware revenues and higher operating expenses.

Net income (excluding stock-based compensation and other one-time items) was $2.81 billion compared with $2.76 billion in the year-ago quarter. Earnings (excluding stock-based compensation and other non-recurring items and related tax effect) increased 5.1% year over year to 62 cents per share, in line with the lower-end of management’s guided range of 62 to 66 cents.

Oracle Corporation - Earnings Surprise | FindTheBest

Liquidity

Oracle exited the quarter with cash and marketable securities of $51.62 billion compared with $38.82 billion at the end of the previous quarter. GAAP operating cash flow was $15.36 billion compared with $14.92 billion in the previous quarter.

Free cash flow of $14.73 billion ($14.34 billion in the previous quarter) was noteworthy, providing ample liquidity to Oracle to pursue acquisitions, sustain dividend payments and further share repurchase.

Oracle bought back 49 million shares for $2 billion in the quarter. The company’s board of directors recently approved an additional $13 billion for share repurchase, which increased the total authorization to $15 billion.

Executive Changes

Oracle’s board elected Larry Ellison as the Executive Chairman and Chief Technology Officer while Mark Hurd and Safra Catz were appointed as the Chief Executive Officer (CEO).

Guidance

For the second quarter of 2015, Oracle expects non-GAAP earnings in the range of 66 to 70 cents per share.

Revenues on a non-GAAP basis are expected to grow in the range of 0% to 4% (in dollars). Software and cloud revenue growth is expected to range within 3% to 6%. The recently acquired MICROS is expected to contribute $14 million in on-premise new license revenues for the quarter.

SaaS and PaaS revenues are forecasted to grow 39% to 44% (in dollars). IaaS is forecasted to grow in the range of 39% to 43%. Hardware revenues are expected in the range of (10%) to flat for the upcoming quarter.

Our Take

Although Oracle’s first-quarter results were disappointing, its growth prospects in SaaS, PaaS and Big Data are encouraging. We believe that the speedy adoption of engineered systems and cloud suites will drive incremental top-line growth in 2015.

However, Oracle’s continuing transition from licensing where revenues are recognized upfront to cloud subscription model where it is recognized over the years, will hurt the top line in the near term.

Nonetheless, higher SaaS & PaaS adoption is expected to provide a recurring high-margin revenue base over the long term. However, increasing mix of lower-margin IaaS will hurt profitability.

We believe that Oracle’s cloud business will continue to face stiff competition from Workday and Salesforce.com (CRM). In ERP, SAP AG (SAP) remains a dominant force, while in the IaaS segment it will compete against the likes of Amazon. Further, hardware revenue growth will suffer due to sluggish IT spending and competition from International Business Machines (IBM).

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

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