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Why Is Oracle (ORCL) Up 2.7% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Oracle (ORCL). Shares have added about 2.7% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Oracle due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Oracle Beats Q3 Earnings & Revenues Estimates

Oracle delivered third-quarter fiscal 2019 non-GAAP earnings of 87 cents per share, which surpassed the Zacks Consensus Estimate of 84 cents. Revenues of $9.618 billion marginally surpassed the Zacks Consensus Estimate of $9.608 billion.

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Earnings increased approximately 8% from the year-ago quarter (up 12% in cc). Further, revenues decreased 1% year over year but increased 3% in cc. This was toward the higher range of management’s guidance of 2-4% in cc.

Structural Changes

The company adopted a new Accounting Standards Codification ("ASC") 606, using the full retrospective method in the fiscal fourth quarter.

In first-quarter fiscal 2019, Oracle launched a bring-your-own-license (BYOL) program, which enabled customers to shift their existing on-premise licenses to the Oracle Cloud. In doing so, Oracle claims that licenses covered by the BYOL program can neither be defined as on-premise nor as cloud.

Consequently, the company started reporting its new software licenses under its new Cloud license and on-premise license segment. Further, the company merged its Cloud SaaS, Cloud PaaS and IaaS along with its software license updates and product support into Cloud services and license support.

Quarter in Detail

Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud services and license support revenues (70% of total revenues) for the reported quarter advanced 1% (4% in constant currency) to $6.66 billion.

However, total cloud license and on-premise license decreased 4% year over year (flat in constant currency) to $1.25 billion.

Management announced that Fusion ERP and Fusion HCM together is more than $2.8 billion annually. Fusion ERP was up 47% for the year. NetSuite ERP revenues increased 30%.

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

Total hardware revenues were $915 million, down 8% (4% in cc) year over year. Revenues for Services decreased 1% but increased 3% in cc to $786 million.

Operating Details

Non-GAAP operating expenses, as a percentage of revenues, contracted 120 basis points (bps) to 55.5%.

As a result, non-GAAP operating income during the reported quarter was $4.28 billion, up 2% from last year (5% in cc). Non-GAAP operating margin expanded 100 bps year over year and came in at 44%.

Balance Sheet & Cash Flow

As of Feb 28, 2019, Oracle had cash & cash equivalents, and marketable securities of $40.03 billion, down from $49.39 billion sequentially. Operating cash flow for the nine months ended Feb 28, 2019, was $10.1 billion while free cash flow was $13.2 billion.

Share Repurchases & Dividends Continue

Oracle repurchased around 206 million shares worth $10 billion during the reported quarter. Over the last 12 months, the company repurchased 728 million shares. It also increased the quarterly dividend to 24 cents per share (up 26% from the previous quarter), payable on Apr 25, 2019.

Guidance

For the fourth quarter of 2019, total revenues are anticipated to grow 1-3% in cc.

Non-GAAP earnings are anticipated to be $1.05-$1.09 per share for the fourth quarter while in constant currency non-GAAP earnings are expected to be $1.08-$1.12 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Oracle has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, Oracle has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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