Oracle Corp (ORCL) reported mixed first quarter fiscal 2014 results. Although earnings of 56 cents (excluding amortization, acquisition related charges and restructuring) beat the Zacks Consensus Estimate by 3 cents, revenues of $8.38 billion missed the consensus mark.
Oracle provided cautious second quarter guidance due to tough year-over-year comparisons and lack of visibility surrounding the closure of corporate deals. Shares fell 3.0% ($1.02) following the weaker-than-expected outlook.
Revenues
Revenues increased 2.1% year over year to $8.38 billion in the first quarter of fiscal 2014. Unfavorable currency negatively impacted revenues by 2.0% in the quarter.
The year-over-year growth rate missed management’s guided range of 3.0% – 6.0% growth. The modest growth in revenues was primarily driven by higher software revenues, which were partially offset by declining hardware and services revenues.
Software revenues (72.6% of revenues) increased 6.1% year over year to $6.09 billion, primarily driven by a 6.9% increase in software license update and product support revenues. New software licenses and cloud software subscription revenues climbed 4.0%, which was in line with the mid-point of the management guided range of 0.0% to 8.0% growth.
New software licenses and cloud software subscription revenues grew 14.0% from the year-ago quarter in Americas but declined 4.0% in Europe, Middle East and Africa (“EMEA”) and 5.0% in Asia-Pacific.
Database grew at a double-digit growth rate in the quarter, driven by strong performance from Database Options and Enterprise Manager. Oracle won a number of significant cloud customers such as A&A, LinkedIn, SIRIUS XM Radio, Telus and Barclays Bank. The company’s Taleo product also won a number of contracts with major customers such as Honeywell, Emerson, Humana, Xilinx and DIRECTV.
During the first quarter, Oracle entered into partnerships with Microsoft (MSFT), NetSuite and Salesforce.com (CRM).
Hardware revenues declined 6.7% year over year to $1.27 billion. This was primarily due to a 14.1% year-over-year decline in hardware systems products revenues, which was partially offset by 3.3% growth in hardware systems support.
Engineered systems (Exadata, Exalogic, Exalytics) customer base continued to grow in the quarter as the company added new clients such as Eton, Telecom Italia, China Mobile, SunGard, Ingersoll Rand and Hitachi.
Oracle shipped more than 800 units (40.0% sold to new customers)
of engineered systems during the quarter. Exalytics, SPARC SuperCluster and the Oracle Database Appliance all grew more than 100.0% in the quarter.
Hardware systems product sales declined in all the regions with Americas down 12.0% and EMEA down18.0% year over year in the quarter. Revenues declined 15.0% in the Asia-Pacific region.
Services revenues declined 7.8% year over year to $1.03 billion in the reported quarter.
Margins
Total operating expenses as a percentage of revenues declined 70 basis points (bps) from the year-ago quarter to 57.7%. Sales & marketing (S&M), research & development (R&D) and Services jointly incurred 78.0% of the operating expenses in the quarter.
S&M and R&D expenses increased 160 bps and 20 bps, respectively, on a year-over-year basis in the quarter. However, Services as a percentage of revenues declined 120 bps from the year-ago quarter.
Operating margin jumped 70 bps on a year-over-year basis to 42.3%, primarily due to declining operating expenses. Net income margin expanded 170 bps on a year-over-year basis to 31.2% in the quarter.
Liquidity
Oracle exited the first quarter with cash and marketable securities of $39.10 billion compared with $32.22 billion at the end of the previous quarter. GAAP operating cash flow was $14.85 billion compared with $14.22 billion in the previous quarter.
Free cash flow of $14.18 billion ($13.57 billion in the previous quarter) was impressive, providing ample liquidity to Oracle in order to pursue acquisitions, sustain dividend payments and further share repurchase. Oracle bought back 92.8 million shares for $3.0 billion in the quarter.
Guidance
For the second quarter of 2014, Oracle expects non-GAAP earnings in the range of 65 to 70 cents per share.
Total revenue on a non-GAAP basis is expected to grow in the range of (1.0%) to 2.0% (in $). New software license and cloud subscription revenue growth is expected to range from (6.0%) to 4.0%. Hardware product revenues are expected to decline in the range of 11.0% to 1.0% in the upcoming quarter.
Our Take
We believe that sales execution will be of utmost importance over the next couple of quarters as proper execution will result in strong conversion as well as boost contract win rates. However, soft demand environment and stiff competition from the likes of International Business Machines (IBM) are the major headwinds in near term.
We believe that Oracle needs to improve top-line growth in order to boost investor confidence in the near term. The speedy adoption of engineered systems and cloud suites will drive incremental top-line growth going ahead.
Currently, Oracle has a Zacks Rank #3 (Hold).
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