Shares of Oracle Corp. (ORCL) plunged approximately 8.8% ($2.91) on the heels of a less than impressive fourth quarter result. The company reported earnings of 84 cents per share in fourth quarter 2013 (including stock-based compensation of $186.0 million), which was in line with the Zacks Consensus Estimate. However, revenues missed the consensus estimate of $11.27 billion.

Revenues

Revenues of $10.96 billion remained flat on a year-over-year basis while jumping 22.2% sequentially. Revenues were within management’s guided range of (1.0%) - 4.0% growth forecast.

The flat year-over-year revenues were primarily due to lower-than-expected growth in the software segment coupled with lackluster performance from the hardware and services segment in the quarter.

Software revenues climbed 3.3% year over year to $8.44 billion, primarily driven by a 5.9% increase in software license update and product support revenues. New software licenses and cloud software subscription revenues inched up 0.7%, which missed the lower end of management’s guided range of 1.0% to 11.0% growth.

Software revenues jumped 26.3% on a sequential basis as new software licenses and cloud software subscriptions surged 72.5% from the previous quarter. The sequential improvement was primarily due to significant improvement in sales force execution.

New software licenses and cloud software subscription sales were weak in Asia-Pacific, where revenues declined 7.0% year over year, while in Americas and Europe, the Middle East & Africa, revenues increased 4.0% and 5.0%, respectively.

Hardware revenues declined 9.2% year over year to $1.44 billion. This was primarily due to a 13.1% year-over-year decline in hardware systems products revenues. Sequentially, hardware revenues jumped 15.4%, driven by a 26.5% increase in hardware systems products revenues.

Engineered systems (Exadata, Exalogic, Exalytics) revenues jumped approximately 50.0% in the quarter. Oracle’s engineered systems continued to grab share from P-series of International Business Machines (IBM).

The company sold more than 1200 systems, which include 600 Exadata units and 100 units of Exalytics. Oracle added a number of new customers in the quarter that include the likes of Fidelity (FIS), Siemens and McGraw-Hill (MHFI).

Hardware systems product sales declined in all the regions with Americas down 12.0%, followed by Europe, the Middle East & Africa, where revenues declined 11.0% year over year in the quarter. Revenues declined a massive 17.0.0% in the Asia-Pacific region.

Services revenues declined 9.5% year over year but increased 4.1% sequentially to $1.09 billion in the reported quarter.

Margins

Total operating expenses as a percentage of revenues declined 30 basis points (“bps”) from the year-ago quarter and 440 bps from the previous quarter to 50.9%. Sales & marketing (“S&M”), research & development (“R&D”) and Services jointly incurred 83.0% of the operating expenses in the quarter.

S&M and R&D expenses increased 90 bps and 30 bps, respectively on a year-over-year basis in the quarter. However, services as a percentage of revenues declined 70 bps from the year-ago quarter.

Operating margin jumped 30 bps on a year-over-year basis to 49.1%, primarily due to declining operating expenses, which fully offset flat year-over-year revenues. On a sequential basis, operating margin increased 440 bps to due higher-than-expected decline in operating expenses.

Net income margin contracted 10 bps from the year-ago quarter but increased 310 bps sequentially to 36.4% in the quarter.

Earnings per share increased 5.1% year over year and 35.2% quarter over quarter to 84 cents in the quarter.

Liquidity

Oracle exited the fourth quarter with cash and marketable securities of $32.22 billion compared with $33.41 billion at the end of the previous quarter. GAAP operating cash flow was $14.22 billion compared with $13.72 billion in the previous quarter.

Free cash flow of $13.57 billion ($13.03 billion in the previous quarter) was impressive providing ample liquidity to Oracle in order to pursue acquisitions, sustain dividend payments and further share repurchase. Oracle bought back 85.0 million shares for $2.8 billion in the quarter.

Guidance

For the first quarter of 2014, Oracle expects non-GAAP earnings in the range of 56 to 59 cents per share.

Total revenue on a non-GAAP basis is expected to grow in the range of 3.0% to 6.0% (in $). New software license and cloud subscription revenue growth is expected to range from 0.0% to 8.0%. Hardware product revenues are expected to decline in the range of (6.0%) to (2.0%) in the upcoming quarter.

Oracle is restarting its quarterly dividend payment and hiked its dividend by 100.0% to 12 cents. Oracle’s board of directors also approved an additional share buyback program worth $12.0 billion.

Recommendation

We believe that Oracle needs to improve top-line growth in order to boost investor confidence in the near term. We believe that the speedy adoption of engineered systems and cloud suites will drive incremental top-line growth going ahead.

Moreover, improving sales execution will result in strong conversion as well as win rates in the near term. Hardware growth is also expected to rebound in the first quarter of 2014, driven by new product introductions.

However, continuing macro-economic weakness and stiff competition from IBM remain major headwinds in the near term.

Currently, Oracle has a Zacks Rank #4 (Sell).

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