Oracle Corp.’s (ORCL) second-quarter fiscal 2015 earnings of 65 cents (including stock-based compensation but excluding other non-recurring items and related tax effect) came in line with the Zacks Consensus Estimate. The quarterly earnings were primarily driven by a significant rise of 45% year over year to $516 million in the cloud revenues, which includes SaaS, PaaS and IaaS.
Overall, the company’s stock prices remained bullish in Tuesday’s trading and closed 1.3% (53 cents) higher at $41.16. Following the earnings release, Oracle gained 4% in the after-hours trading.
Revenues
Revenues increased 3.5% year over year to $9.60 billion and surpassed the Zacks Consensus Estimate of $9.53 billion. The company’s revenue growth remained within the second-quarter guidance range of 0% to 4%.
Software and cloud revenues increased 5% year over year to $7.3 billion, within the previously guided range of 3% to 6%.
Software revenues (76.4% of total revenue) increased 4.8% year over year to $7.33 billion, primarily driven by 5.6% increase in software license update and product support revenues. New software licenses declined 3.6% on a year-over-year basis.
Cloud SaaS and PaaS revenues jumped 39.4% year over year to $361 million. Cloud IaaS revenues surged 59.8% from the year-ago quarter to $155 million. All the three segments are on track to achieve $2.0 billion run rate.
Cloud bookings soared 140% and Oracle won 860 SaaS customers. The company added 230 customers who adopted Human Capital Solution (HCM). Fusion overall had triple-digit bookings and revenue growth. The company added nearly 200 net new Fusion customers.
Hardware revenues of $1.33 billion grew 0.8% on a year-over-year basis. The growth was primarily attributed to 1.3% and 0.4% year-over-year improvement in hardware systems support and hardware systems product revenues, respectively.
Engineered systems (Exadata, Exalogic, Exalytics, Big Data Appliance and SPARC SuperCluster) grew double digits.
Services revenues declined 2.5% year over year to $935 million.
Geographically, the Americas increased 4.5% year over year to $5.22 billion. Europe, Middle East and Africa (EMEA) increased 3.3% from the year-ago quarter to $2.91 billion. Asia Pacific inched up 0.2% year over year to $1.47 billion.
Margins
Total operating expenses as a percentage of revenues (excluding one-time items) increased 60 basis points (bps) from the year-ago quarter to 56.9%.
S&M expense decreased 40 bps on a year-over-year basis. Services, as a percentage of revenues, declined 20 bps from the year-ago quarter. However, R&D expense increased 80 bps year on year.
Operating margin (including stock-based compensation but excluding one-time items) contracted 60 bps year over year to 43.1%, primarily due to higher-than-expected decline in hardware revenues and higher operating expenses.
Net income (excluding stock-based compensation and other one-time items) was $3.12 billion compared with $3.16 billion in the year-ago quarter. Earnings per share (excluding stock-based compensation and other non-recurring items and related tax effect) remained flat year over year to 69 cents, in line with the higher-end of management’s guided range of 66 to 70 cents.
Liquidity
Oracle exited the quarter with cash and marketable securities of $44.73 billion compared with $51.62 billion at the end of the previous quarter. GAAP operating cash flow was $7.8 billion as against $15.36 billion in the last quarter.
Free cash flow of $14.55 billion compared with $14.73 billion in the earlier quarter. Oracle bought back 52.8 million shares for $2.1 billion. Further, the company’s board of directors recently declared a quarterly dividend of 12 cents per share.
Guidance
For the third quarter, total revenue growth on a non-GAAP basis is expected to range within 4% to 8%. Non-GAAP earnings per share are expected in the 69 to 74 cents range.
On a non-GAAP basis, SaaS and PaaS is expected to grow in the 30% to 34% range, while IaaS is likely to grow in the range of 29% to 33%.
Software and Cloud revenues are expected to grow between 5% and 8%. Hardware system revenues are expected between negative 2% and positive 8%.
The company targets to sell more than $250 million of new annual SaaS and PaaS subscriptions in the fourth quarter of fiscal 2015. In addition, it targets to sell over $1 billion of new SaaS and PaaS annual subscriptions in fiscal 2016.
Our Take
We believe strong 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 fiscal 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.
Currently, Oracle has a Zacks Rank #4 (Sell).
Stocks to Consider
Better-ranked stocks in this sector include Actuate Corp. (BIRT) and Advent Software, Inc. (ADVS), sporting a Zacks Rank #1 (Strong Buy) and Adobe Systems Inc. (ADBE) with a Zacks Rank #2 (Buy).
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