ORCL Stock: Oracle Q2 Earnings & Revenues Top, Tepid Cloud View

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delivered stellar second-quarter fiscal 2018 results. Non-GAAP earnings of 70 cents per share and revenues of $9.63 billion comfortably beat the Zacks Consensus Estimate of 68 cents and $9.555 billion, respectively.

Earnings increased 14.8% from the year-ago quarter. This was primarily driven by 6% (4% in constant currency) growth in revenues that was in line with the high end of management’s guidance of 4-6%.

Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud revenues (15.9% of total revenue compared with 11.9% in the year-ago quarter) advanced 44% (43% in constant currency) to $1.52 billion.

Moreover, total cloud and on-premise software revenues increased 9% (7% in constant currency) to $7.83 billion.

We believe that the company’s growing cloud market share will continue to drive top-line growth in the foreseeable future.

Shares Decline on Soft Outlook

Shares were down 6.6% in after-hour trading following the results. The decline can be attributed to soft cloud outlook.  Cloud revenues including Software as a service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) are expected to grow between 21% and 25%, much lower than 44% reported by Oracle in the last quarter.

Notably, Oracle’s stock has gained 26.8% year to date, underperforming the rally of 39% of the industry it belongs to. We believe that a slowdown in the cloud momentum can further drag down the stock price in fiscal 2018.

Cloud Drove Solid Top Line

Cloud SaaS revenues advanced a significant 54.9% (53% in constant currency) year over year to $1.123 billion. Cloud PaaS and IaaS revenues surged 20.7% (19% in constant currency) to $396 million.

On-premise software revenues (65.5% of total revenues compared with 67.8% in the year-ago quarter) increased 2.9% (1% at constant currency) to $6.3 billion reflecting continued higher attachment rates of software support and renewal rates.

Management stated that Fusion ERP and Fusion HCM soared 65%.

Software license updates and product support revenues were almost $4.953 billion, up 4% (2% in constant currency). On a combined basis, on-premise support and SaaS revenues were up 9%.

Total hardware revenues slipped 7% (down 9% at constant currency) year over year to $940 million. Services revenues increased 1% (flat at constant currency) to $856 million.

Operating Details

Cloud Software as a service margin came in at 66% as compared with 59% reported in the year-ago quarter.

Non-GAAP operating expenses, as percentage of revenues, decreased 160 basis points (bps) to 56.4%. The decline can primarily be attributed to lower hardware and research & development expenses, which were down 9.1% and 2.3%, respectively.

As a result, non-GAAP operating margin expanded 200 bps from the year-ago quarter to 44%.

Balance Sheet & Cash Flow

As of Nov 30, 2017, Oracle had cash & cash equivalents and marketable securities of $71.58 billion, up $66.89 billion sequentially. Operating cash flow during the quarter was $14.58 billion, while free cash flow was $12.54 billion.

Share Repurchase & Dividend Continues

Oracle increased the share repurchase authorization program by $12 billion. The company also declared a quarterly dividend of 19 cents per share, payable on Jan 24, 2018.

Guidance

For the third-quarter, total revenues are anticipated to grow in the range of 2-4%.

Earnings are anticipated to be between 68 cents and 70 cents for the quarter, with a positive impact of couple of cents from favorable currency tailwind. The high-end of the guidance is lower than the Zacks Consensus Estimate for earnings, which was pegged at 72 cents.

Our Take

The company provided encouraging second-quarter results, with both the top and bottom line surpassing the Zacks Consensus Estimate. Also, year-over-year comparisons on both counts were favourable.

Oracle is benefiting from significant momentum in its SaaS and PaaS offerings. This has also helped in improving the company’s competitive position against salesforce.com and Workday (WDAY – Free Report) . We believe that the company’s growing cloud market share will continue to drive top-line growth. This is further evident from the expanding customer base.

Going forward, the next-generation autonomous database launched by Oracle, which is supported by machine learning, is a key catalyst. Management believes that the new database will improve Oracle’s competitive position in the cloud against Amazon Web Services (“AWS”).

However, higher investments on IaaS will affect gross margin expansion in the near term. Further, a strong U.S. dollar remains a headwind.

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