Oracle's Low Expectations Lead To Well-Received Q3 Results

Amid lower expectations, investors cheered Oracle Corporation ORCL’s third quarter results, which delivered a beat on both consensus revenue and EPS for the first time since November 2014.

“Our primary bullish thesis on Oracle is driven by our view that it can grow operating income dollars, despite mix issues,” BMO Capital analyst Keith Bachman wrote in a note.

For the third quarter, Oracle grew operating income margin (42.5 percent vs. 42.4 percent in the February 2016 quarter), and grew operating income dollars by 3.2 percent.

For FY2018, Bachman expects the operating margin to be roughly flat with last year, but projects operating income dollar growth of 3.3 percent.

“If Oracle can consistently grow operating income, we believe the shares will move higher,” Bachman continued.

Cloud Growth

Bachman is also positive on Cloud SaaS-PaaS revenue growth of 86 percent, which was better than his 84.8 percent estimate.

Oracle expects SaaS-PaaS revenue growth of 69–73 percent in the May quarter, which suggest lower growth excluding NetSuite. Bachman sees SaaS-PaaS revenue of $3.97 billion in FY2017 and $5.75 billion in FY2018.

Can Oracle Deliver Double-Digit EPS Growth?

However, Bachman noted Oracle will have difficulty growing EPS double digits if maintenance revenue growth slows further.

The analyst said software maintenance revenue in the February quarter was in line with his estimate at 3 percent and the guidance implies that software maintenance will grow by less 2 percent in the May quarter.

“Despite Oracle's comments that it believes FY2018 EPS will grow by double digits, we project EPS growth of ~6% y/y,” Bachman elaborated.

But, Bachman reiterated his Outperform rating and raised his price target by $3 to $48.

“[W]hile Oracle has not always delivered against longer-term guidance, we believe that comments that EPS will grow by 10% in FY2018 will generate investor interest in the shares given current valuation,” Bachman added.

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