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Why Is Oracle (ORCL) Down 3.6% Since Last Earnings Report?

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It has been about a month since the last earnings report for Oracle (ORCL - Free Report) . Shares have lost about 3.6% in that time frame, underperforming the S&P 500.

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

Oracle's Q2 Earnings Beat Estimates, Revenues Miss

Oracle reported second-quarter fiscal 2020 non-GAAP earnings of 90 cents per share, which beat the Zacks Consensus Estimate by 2.3%. However, non-GAAP revenues of $9.615 billion missed the Zacks Consensus Estimate by 0.2%.

Nonetheless, the bottom line increased 12% from the year-ago quarter’s reported figure (up 13% in constant currency). The top line also inched up 1% (in USD and at cc) year over year.

Top Line in Detail

Oracle reported total revenues (on a GAAP basis) of $9.614 billion, up 1% (in USD and at cc) year over year.

Revenues by Offerings

Oracle’s top line benefited from the ongoing cloud-based momentum. Cloud services and license support revenues (71% of total revenues) in the reported quarter rose 3% year over year (up 4% in cc) to $6.811 billion.

Meanwhile, cloud license and on-premise license revenues (12% of total revenues) declined 7% year over year (down 7% in cc) to $1.126 billion.

Hardware revenues (9% of total revenues) were $871 million, down 2% (down 1% in cc) year over year.

Services revenues (8% of total revenues) inched down 1% to $806 million (flat at cc).

Revenues by Geography

Revenues from Americas (represented 55.2% of total revenues) dropped 1.2% year over year to $5.304 billion.

Revenues from Europe/Middle East/Africa (28%) declined 3.1% from the year-ago quarter’s figure to $2.695 billion.

However, revenues from Asia Pacific (16.8%) improved 5% from the year-ago quarter’s level to $1.615 billion.

Break up of Cloud and License Revenues

Oracle reported total cloud and license revenues of $7.937 billion, which inched up 1% from the year-ago quarter’s level.

Applications revenues (contributed 37% to total cloud and license revenues) amounted to $2.909 billion, up 4% year over year.

Infrastructure related revenues (63%) came in at $5.028 billion, flat year over year.

Customer Expansion Bodes Well

Management announced that NetSuite ERP and Fusion ERP businesses were up 29% and 37% in fiscal second quarter, respectively. NetSuite ERP and Fusion ERP have customer strength of around 20,000 and 7,000, respectively. Expanding customer base is enabling the company to maintain leading position in cloud ERP market.

Additionally, the company is witnessing strong growth in Cloud HCM, which is increasingly being purchased as a part of an ERP cloud application suite. Also, the migration of several midsized SAP customers to Fusion ERP is an upside.

Further, the next-generation autonomous database launched by Oracle, supported by ML, is gaining traction. In the reported quarter, Oracle added around 2,000 new Autonomous Database cloud customers. New product introductions are likely to further boost growth in this category. Markedly, autonomous database in Gen2 Infrastructure is witnessing rapid adoption.

The company is undertaking every effort to enhance functionalities of cloud-based applications, which is encouraging adoption. These initiatives are expected to provide the company an edge in the Database-as-a-Service market and reinforce its competitive position against Amazon Web Services.

Operating Details

Non-GAAP operating expenses increased 2% year on year to $5.573 billion.

Non-GAAP operating income during the reported quarter was $4.042 billion, down 1% year over year.

Non-GAAP operating margin contracted 100 bps year over year and came in at 42%.

Balance Sheet & Cash Flow

As of Nov 30, 2019, Oracle had cash & cash equivalents, and marketable securities of $27.4 billion, down from $35.7 billion sequentially.

Operating cash flow for the 12 months ended Nov 30, 2019 was $13.8 billion while free cash flow was $12.2 billion.

Share Repurchases & Dividends

Oracle repurchased shares worth approximately $5 billion during the fiscal second quarter, and paid out dividends worth approximately $1.562 billion during the first half of the fiscal.

The company declared a quarterly dividend of 24 cents per share, payable on Jan 23, 2019, to shareholders as on Jan 9, 2019.

Q3 Guidance

For fiscal third quarter, Oracle expects non-GAAP revenues to rise in the range of 1-3%, both at USD and cc. The guidance assumed currency headwind of 1%.  

Oracle expects non-GAAP earnings per share in the range of 96-98 cents in cc (and 95-97 cents excluding currency impact).

How Have Estimates Been Moving Since Then?

Estimates revision followed an upward path over the past two months.

VGM Scores

At this time, Oracle has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

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

Outlook

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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