Oracle Doubles Dividend, Steps Up Buyback As Software Sales Disappoint

by Trefis Team
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Oracle (NASDAQ:ORCL) reported flat revenue growth in its Q4 fiscal 2013 earnings disappointing the market expectations. [1] Total revenues stood unchanged at $10.9 billion, below its Q3 earnings guidance. While the company continued to face significant challenges in its hardware business, the most disappointing factor was lower growth in the software business for the second consecutive quarter. Total new software sales and cloud subscription revenues grew by only 1% even though Q4 has traditionally been one of the strongest quarters for Oracle.

Operating margins (after adjusting for one-time items) improved marginally primarily on improved product mix. Non-GAAP operating income was up 1% to $5.6 billion, and non-GAAP operating margin was close to 51%, up from 50% last year. [2] To soothe investor concerns and show its ability to generate cash, Oracle doubled its quarterly cash dividend from $0.06 to $0.12. Further, it also announced a stock buyback of upto $12 billion under its existing share repurchase program. However, the move probably failed to inspire investor confidence as the stock slumped close to 10% post the earnings announcement. Below we take a detailed look at the trends observed during the earnings.

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Software Business Disappoints, Operating Margins Improve

In Q4, Oracle registered a 1% increase in revenue from new software licenses as well as cloud subscriptions, which came in at the lower end of its expectations of 1%-11% growth. [3] Oracle blamed weakness in Asia and Brazil for disappointing sales rather than competition from other cloud software leaders. Persistent weakness in the European markets also weighed on growth. Growth in new software licenses is the key to measure future growth as it allows for recurring revenues from the high margin maintenance and support business. However, part of its cloud business including HCM, CRP and CRM cloud exhibited robust 50% growth, with its much hyped next-generation Fusion Applications performing well. Oracle had key wins in the CRM and HCM space, winning clients like eBay, KLM Royal Dutch Airlines, Dow Corning, Sprint Nextel, Capital One, US Foods, Acer, Tesco and Paccar. Its cloud run rate crossed $1 billion during the quarter. Revenue from software maintenance continued to grow at mid-single digits as the existing clients continued to pay recurring fees for software support and updates.

The hardware product business continued to decline at double digit rates as the sales of server-systems kept on shrinking. While part of this was due to dwindling IT spending amid a weak economic environment and hardware commoditization, the separation from its once-close partner, HP, following the acquisition of Sun Microsystems has also hurt the company. We, however, are encouraged to see that its engineered systems have been gaining traction with all of its Exa products witnessing robust growth. The Exa line of products are helping Oracle ride the Big Data trend while enabling it to improve its hardware margins by phasing out older legacy hardware, launching new high-margin hardware, and bundling it with its software products. Revenue from engineered systems were up 50% and slowed down the overall rate of decline in the hardware business. The hardware business is expected to come back on growth track by early next year.

Overall, gross margins increased as the revenue share of high margin software maintenance increased during the quarter. Gross margins also benefited from a favorable mix in the hardware segment with the sales of high margin branded products inching higher. The higher gross profit lifted operating margins despite the rapid increase in sales & marketing and R&D costs. The company is investing heavily in its sales efforts to boost its cloud business and gain momentum through new contracts and strategic partnerships. The company will be soon announcing technology partnerships with some of the largest and most important Software-as-a-Service (SaaS) companies and infrastructure companies in the cloud space.

The company has guided for 3%-6% growth in total revenues for the next quarter, excluding the currency impact. New software licenses and cloud subscription non-GAAP revenue growth is expected to range 0% – 8% in reported dollars, while the hardware product revenue growth will range from a negative 6% to 2% in reported dollars. Non-GAAP EPS is expected to be between $0.56 – $0.59 in constant dollars.

We are in the process of updating our $40 Trefis price estimate for Oracle, which currently stands nearly 30% above its current market price.

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Notes:
  1. Q4 FY13 Earnings Press Release and Financials, Oracle, June 20 2013 []
  2. Oracle’s CEO Discusses F4Q13 Results – Earnings Call Transcript, Seeking Alpha, June 20, 2013 []
  3. Oracle’s CEO Discusses F3Q13 Results – Earnings Call Transcript, Seeking Alpha, March 20 2013 []
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