Oracle Misses on Q3 Earnings and Revs - Analyst Blog

Oracle Corp. ORCL reported disappointing third-quarter fiscal 2014 results. Earnings of 65 cents (including stock-based compensation but excluding other non-recurring items and related tax effect) missed the Zacks Consensus Estimate by a couple of cents. Revenues also missed the Zacks Consensus Estimate of $9.36 billion.

Revenues

Revenues increased 3.8% year over year to $9.32 billion in the third quarter of fiscal 2014. Unfavorable currency negatively impacted revenues by 2.0% in the reported quarter. The year-over-year growth was approximately in line with management's guided range of 2.0–6.0% growth.

Software revenues (75.0% of revenues) increased 4.5% year over year to $6.99 billion, primarily driven by 5.1% increase in software license update and product support revenues. New software licenses increased 3.5% from the year-ago quarter. Unfavorable currency negatively impacted revenues by 1.0% in the quarter.

Cloud subscription revenues jumped 24.0% year over year to $292.0 million. Bookings growth (more than 60.0%) was much higher than cloud subscription revenue growth. Exadata, Exalytics and Business Intelligence software increased more than 30.0% in the quarter.

In Human Capital Management (HCM), Oracle added 250 customers, approximately four to five times of the number of customers reported by the nearest rival Workday. Oracle achieved strong growth in all major products that include Core HR, Payroll and Talent Cloud, double-digit growth in Taleo and triple-digit growth in Enterprise Resource Planning (ERP) applications.

Hardware revenues of $1.33 billion increased 6.6% on a year-over-year basis. Unfavorable currency negatively impacted revenues by 2.0% in the quarter. The improvement was primarily due to 8.0% and 4.9% year-over-year growth in hardware systems product and hardware systems support revenues, respectively.

Engineered systems (Exadata, Exalogic, Exalytics, Big Data Appliance, SPARC SuperCluster) grew more than 30.0% (on a constant currency basis) in the quarter and now accounts for approximately one-third of hardware product revenues.

Engineered systems products grew in double digits, while SPARC SuperCluster achieved triple-digit growth in the last quarter. The company continues to win market share from International Business Machines Corp. IBM in the quarter.

Services revenues declined 3.8% year over year to $1.00 billion in the reported quarter.

Geographically, the Americas grew 5.3% year over year, primarily driven by strong performance in Latin America. Europe, Middle East and Africa (EMEA) increased 6.5% from the year-ago quarter. Asia Pacific declined 5.5% year over year, due to weak performance in Australia and India.

Margins

Total operating expenses as a percentage of revenues remained almost flat with the year-ago quarter at 55.3%. Sales & marketing (S&M), research & development (R&D) and Services jointly incurred 78.2% of the operating expenses in the quarter.

S&M and R&D expenses increased 60 basis points (bps) and 70 bps, respectively, on a year-over-year basis in the quarter. The year-over-year growth in S&M expense reflects Oracle's growing sales personnel base. However, services as a percentage of revenues declined 90 bps from the year-ago quarter.

Operating margin also remained flat on a year-over-year basis at 44.7%. Net income margin declined 130 bps on a year-over-year basis to 32.0% in the quarter.

Liquidity

Oracle exited the quarter with cash and marketable securities of $37.22 billion compared with $36.97 billion at the end of the previous quarter. GAAP operating cash flow was $15.03 billion compared with $15.20 billion in the previous quarter.

Free cash flow of $14.42 billion ($14.62 billion in the previous quarter) was noteworthy, providing ample liquidity to Oracle in order to pursue acquisitions, sustain dividend payments and further share repurchase. Oracle bought back 55.4 million shares for $2.0 billion in the quarter.

Guidance

For the fourth quarter of 2014, Oracle expects non-GAAP earnings in the range of 92 to 99 cents per share. This is slightly better than the Zacks Consensus Estimate of 91 cents.

Revenues on a non-GAAP basis are expected to grow in the range of 3.0% to 7.0% (in dollar). New software license and cloud subscription revenue growth is expected to range from 0.0% to 10.0%. Hardware product revenues are expected in the range of 0.0% to 10.0% in the upcoming quarter.

Our Take

Although Oracle's third-quarter results were disappointing, the company's growth prospects in cloud and Big Data are encouraging.  We believe the speedy adoption of engineered systems and cloud suites will drive incremental top-line growth, going ahead.

Moreover, higher subscription revenues are expected to provide a recurring high-margin revenue base, going forward. Additionally, improvement in sales force hiring rate will continue to boost bookings. However, this may hurt margin expansion in the near term.

Nevertheless, stiff competition from the likes of IBM, Workday, EMC Corp EMC, Salesforce.com and Amazon.com AMZN is the major headwind in the near term.

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