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By Jayson Derrick

Oracle Corporation (NYSE:ORCL) reported quarterly results that were much better-than consensus expectations on license revenue and EPS, with overall revenue in line on weak hardware revenues. License revenue was reported at $2.401 billion representing an increase of 17% year over year and 9% above the street's estimate. The RightNow and Taleo acquisitions added an estimated 7% to growth. Hardware products revenue was a disappointing $734 million, down 23% year over year which was below the Street's estimate at down 15%. Overall revenues grew 3.4% and the reported EPS of $0.64 was above the Street's estimate of $0.61 due to better gross margins and a lower tax rate. All this left investors optimistic about growth in the engineered systems business, but pessimistic about growth in the balance of Oracle's hardware business. The entire quarterly results can be seen here.

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Oracle shares hit a new 52 week high in Wednesday's trading session following Tuesday's quarterly results.

Share Buy Backs Helping EPS

A lower share counted helped the EPS as the company continued to buy back stock at an accelerated rate around $3 billion each of the last two quarters, as compared to the average $700 million over the prior seven quarters. This accelerated pace, coupled with the company's nearly $900 million in accelerated dividends suggests that the recent $6 billion debt raise was likely more to take advantage of low interest rates as opposed to a change in acquisition policy.

Positive IT Spending

Shares in the broader enterprise software sector should trade up following Oracle's results and positive commentary from management. Oracle is unusual in that it has had four prior quarters of modest to no growth on an organic CC basis, so with very easy comparisons, the bar has been set (I believe) pretty low. Oracle nevertheless produced better results which may imply the fiscal cliff issues that were raised in the company's September results may be a bump in the road, but certainly not a show stopper

The Case To Buy:

The shares of Oracle are trading at an attractive valuation and near the 52 week highs. There are four main points I would like to summarize for investors to consider.

  1. License growth was aided by an easy compare with low expectations, but nevertheless reflected an improved performance versus the previous quarter. This improvement is not macro-related but rather a function of Oracle's increased sales hiring in recent quarters and better execution under the new sales model. Oracle has been under the radar for having some horrible sales practices.
  2. The cloud business begins to demonstrate some traction. The cloud business was responsible for $230 million in revenue for the quarter representing about 10% of the overall license and cloud revenues or about 3% of overall revenues, so this number is still small. Cloud is approaching the $1 billion mark for the year, this figure should only grow over time.
  3. The hardware business is likely to turn around and contribute to overall company growth as the mix shifts to fast growth segments in 4Q'13, a bit later than previously expected.
  4. There should be an end (at least a temporary relief) to the stiff headwind given the run up in value of the Euro recently.

Conclusion

Oracle's quarterly performance was not a result of macroeconomic improvement, particularly in the light of the fact that services revenues fell year over year for the fifth straight quarter and the company saw slower relative growth in international markets. The positive results is simply a function of a strong sales team selling amazing products. Oracle's sales efforts should continue to yield better benefits moving forward. Hardware remains a question mark in many investors books continuing to doubt if the next quarter will be any better. As long as expectations remain low (which they are) and Oracle is trading at a valuation less than its historical average and that of the S&P500 then buying some shares presents an attractive risk/reward profile.

Source: Oracle Corporation Results: Good, But Not Great