Oracle's Soft Guidance Overshadowed Strong Results

The enterprise-software company announced lower-than-expected quarterly earnings guidance that managed to offset its strong results. Over four decades old Oracle Corporation ORCL is generating anemic sales growth compared to cloud leaders like Amazon AMZN and Microsoft MSFT. The company is also often criticized for aggressive buybacks and not growing its core business instead. However, it has remained much more resilient than other aging tech giants like IBM IBM.

Q3 figures

Revenue for the fiscal third quarter that ended on February 28^th was $10.09 billion. This is an increase of 3% from last year's quarter which is in line with the company's forecast of 2% to 4% growth. It also exceeded Street forecasts that averaged $10.07 billion. Adjusted profits increased 20% as they amounted to $1.16 a share.

Slow and steady didn't win the cloud race

Like its peers, Oracle saturated its core market over the past few decades and then that same market was disrupted by cloud-based services which were easier to scale than on-premise software. Microsoft managed to adapt to this new environment but even though Oracle's turnaround efforts were more successful than IBM's, its results are far less impressive than Microsoft's.

Oracle's turnaround included two main strategies: it shifted its on-site database and enterprise software toward cloud-based services while aggressively acquiring other cloud-based companies to expand its ecosystem. Those efforts gradually paid off, and Oracle's revenue rose 2% YoY in the first half of fiscal 2021 which started last May as the growth of its cloud services offset the sluggishness of its on-premise business. Analysts expect its revenue to rise about 3% in both fiscal 2021 and 2022 as they are focusing on Oracle's core strengths.

Stable operating margins

Oracle's non-GAAP operating margin for 2020 was 44%, just as it was in 2019. During the first half of fiscal 2021, operating margin expanded from 42% to 46% YoY as operating expenses shrank 5%. Rising margins indicate both that Oracle isn't spending too much cash on its cloud-based transformation, and that it still enjoys plenty of pricing power in its competitive environment.

Its buybacks were beneficial

Oracle has been severely criticized for its aggressive buybacks that used up all of its free cash flow over the past year. But, this strategy was deployed to squeeze out EPS growth from its stagnant revenue. If we put the criticism aside, these well-timed buybacks are a refreshingly honest and effective strategy compared to what tech companies usually do which is use buybacks to offset dilution from stock-based bonuses. What Oracle managed to do through these buybacks is reduce its outstanding share count by nearly 42% over the past ten years. By contrast, IBM significantly reduced its buybacks over the past two years and it is still struggling with sliding revenue and profits.

A comfortable cash cushion

Oracle still has plenty of cash to deploy on investments, acquisitions, dividends, and buybacks. Therefore, it is well-positioned to withstand the next economic downturn, as younger tech companies with more fragile balance sheets resort to secondary offerings and other tactics to stay afloat. In these uncertain times, this is a major strength.

Outlook

Oracle's stock price rallied 75% over the past half of a decade, and it did deliver a total return of about 90% after including reinvested dividends. Although these wins are pale when compared to Microsoft MSFT and Amazon's AMZN triple-digit percentages during the same period, it may be a case of the tortoise versus the hare. So, just because Oracle isn't an ideal investment for growth-oriented investors does not mean it should be ignored.

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