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Oracle Corp. (ORCL - Analyst Report) reported unimpressive fourth-quarter fiscal 2014 results. Earnings of 89 cents (including stock-based compensation but excluding other non-recurring items and related tax effect) missed the Zacks Consensus Estimate by 4 cents.

Earnings (excluding stock-based compensation and other non-recurring items and related tax effect) increased 5.7% year over year to 92 cents per share, in line with the lower-end of management’s guided range of 92 to 99 cents.

Revenues also missed the Zacks Consensus Estimate of $11.46 billion for the second consecutive quarter.

Revenues

Revenues increased 3.3% year over year to $11.33 billion in the fourth quarter of fiscal 2014. The year-over-year growth was slightly above the lower-end of management’s guided range of 3.0–7.0%.

Software revenues (78.7% of revenues) increased 4.3% year over year to $8.92 billion, primarily driven by a 6.6% increase in software license update and product support revenues. New software licenses remained almost flat on a year-over-year basis.

Cloud SaaS and PaaS revenues jumped 23.4% year over year to $327.0 million. Cloud IaaS revenues increased 13.3% from the year-ago quarter to $128.0 million. All the three segments are approaching $2.0 billion run rate.

Cloud bookings jumped 37.0% in fiscal 2014, with fourth quarter being the strongest. In cloud ERP, Oracle won 120 customers during the quarter. The company added 320 customers who adopted Human Capital Solution (HCM). Marketing automation bookings surged 200.0% in the reported quarter.

Hardware revenues of $1.47 billion increased 2.2% on a year-over-year basis. The improvement was primarily due to 2.5% and 1.9% year-over-year growth in hardware systems product and hardware systems support revenues, respectively.

Engineered systems (Exadata, Exalogic, Exalytics, Big Data Appliance and SPARC SuperCluster) grew in double digits in the quarter and now accounts for approximately one-third of hardware product revenues. The company will ship its 10,000th engineered system in the first quarter.

Services revenues declined 3.6% year over year to $940.0 million in the reported quarter.

Geographically, the Americas decreased 0.9% year over year to $5.86 billion. Europe, Middle East and Africa (EMEA) increased 13.2% from the year-ago quarter to $3.77 billion. Asia Pacific declined 0.8% year over year to $1.70 billion.

Margins

Total operating expenses as a percentage of revenues (excluding one-time items) increased 20 basis points (bps) from the year-ago quarter to 51.1%. Sales & marketing (S&M), research & development (R&D) and Services jointly incurred 75.2% of the operating expenses in the quarter.

S&M and R&D expenses both increased 40 bps each on a year-over-year basis in the quarter. The year-over-year increase in S&M expense reflects Oracle’s growing sales personnel base. However, services as a percentage of revenues declined 50 bps from the year-ago quarter.

Operating margin (including stock-based compensation but excluding one-time items) contracted 20 bps year over year to 48.9%.

Net income (excluding stock-based compensation and other one-time items) was $4.19 billion compared with $4.11 billion in the year-ago quarter.

Liquidity

Oracle exited the quarter with cash and marketable securities of $38.82 billion compared with $37.22 billion at the end of the previous quarter. GAAP operating cash flow was $14.92 billion compared with $15.03 billion in the previous quarter.

Free cash flow of $14.34 billion ($14.42 billion in the previous quarter) was noteworthy, providing ample liquidity to Oracle in order to pursue acquisitions, sustain dividend payments and further share repurchase. Oracle bought back 49.0 million shares for $2.0 billion in the quarter.

Guidance

For the first quarter of 2015, Oracle expects non-GAAP earnings in the range of 62 to 66 cents per share. This is much better than the Zacks Consensus Estimate of 60 cents.

Revenues on a non-GAAP basis are expected to grow in the range of 3.0% to 5.0% (in dollars). New software license and cloud revenue growth is expected to range within 6.0% to 8.0%.

SaaS and PaaS revenues are forecasted to grow 25.0% to 35.0% (in dollars). IaaS is forecasted to grow in the range of 9.0% to 19.0%. Hardware revenues are expected in the range of (1.0%) to 3.0% in the upcoming quarter.

Oracle plans to expand SaaS bookings over 50.0% in fiscal 2015.

Our Take

Although Oracle’s fourth-quarter results were disappointing, the company’s growth prospects in SaaS, PaaS and Big Data are encouraging. We believe that the speedy adoption of engineered systems and cloud suites will drive incremental top-line growth in 2015.

However, Oracle’s continuing transition from licensing where revenues are recognized upfront to cloud subscription model where it is recognized over the years, will hurt the top line in the near term.

Nonetheless, higher SaaS & PaaS adoption is expected to provide a recurring high-margin revenue base over the long term. However, increasing mix of lower-margin IaaS will hurt profitability.

We believe that Oracle’s cloud business will continue to face stiff competition from Workday and Salesforce.com (CRM - Analyst Report). In ERP, SAP AG (SAP - Analyst Report) remains a dominant force, while in the IaaS segment it will compete against the likes of Amazon. Further, hardware revenue growth will suffer due to sluggish IT spending and competition from International Business Machines (IBM - Analyst Report).

Currently, Oracle has a Zacks Rank #3 (Hold).

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