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As a long-time Oracle shareholder, I've been hard on the company at times, particularly when I've felt they were spouting rhetoric without the results to back it up. But last week, Oracle signaled to me and presumably the rest of the investment community that perhaps they were starting to 'walk to walk' as much as 'talk the talk.' Last Thursday after the close, Oracle reported formal Q4 results and also painted a very positive outlook for its fiscal first quarter.

You can read the entire transcript here.

The Basics:

  • Total Revenues -- $4.85 billion (+25% YOY)
  • Software License Revenues -- $2.12 billion (+32% YOY)
  • Total Applications Revenues -- $1.32 billion (+66% YOY)
    • New License Revenues -- $641mm (+83% YOY)
    • Ex-Siebel and Retek -- $544mm (+56% YOY)
  • Total Database & Middleware Revenues -- $2.68 billion (+15% YOY)
    • New License Revenues -- $1.48 billion (+18% YOY)
  • Income from Operations -- $2.2 billion (+18% YOY)
  • 45% operating margin (non GAAP)
  • EPS (non GAAP) of $0.29 (+11% YOY)
    • Impacted by 1% higher tax rate
  • Free cash flow increased 28% YOY

Guidance:
CFO Safra Catz provided Q1 guidance and indicated that Oracle will only provide guidance one quarter into the future going forward (a practice they used to maintain years ago).

  • New software license revenue growth of 18%-25%
    • Prior consensus was 12% growth
  • undefined software revenue growth of 23%-25%
  • undefined total revenue growth of 22%-24%
  • Non-GAAP EPS of $0.16 (11%-15% growth)
    • Includes 1% tax rate increase (to 30%)

Key Takeaways:

1) The breadth of Q4's strength is encouraging -- Oracle's Q4 was strong across all product lines and geographies, lending comfort that it wasn't a result of a one-off mega deal or other statistical aberration.

2) The applications business has a lot of runway -- SAP has laid claim to 15+ points of incremental global market share over the last three years and Oracle can, at the very least, stop that bleeding by simply protecting the installed base of its acquired properties. While it's difficult to reconcile the rapid growth at TomorrowNow with Oracle's claim of "record maintenance renewals", the new license revenue does indicate some level of pent up demand within the collective installed base.

3) How do we reconcile the database results -- The database results are more confounding than the applications results. Database is a more mature business (obviously) and I'm surprised to see such wide variance quarter to quarter. Logically, some of the Q4 strength (and weakness in the prior quarters) can be attributed to seasonality but absent a major product upgrade cycle, I'm not sure I completely understand why Oracle's database business had trended in the low single digits for nine months of the year. Looking at longer term trends in the database market, Oracle's dbase business should be a high single-digit, low double-digit annual growth engine.

4) Oracle's Q1 guidance was aggressive, by design -- Long-time Oracle observers understand that a stronger-than-expected Q4 is often followed by a disappointing Q1 (such was the case last year). Typically that would temper investor enthusiasm coming off last week's Q4 numbers. But what was noteworthy on the call was Catz's acknowledgment of Oracle's past Q1 transgressions and, despite the historical weakness prevalent in Q1, the company had to "be realistic" about business trends by raising guidance. From the transcript:

Heather Bellini – UBS

Safra, I agree with you. Your
guidance for Q1, I think some people could be concerned that maybe it
is a little bit aggressive. Could you comment, given the difficulties
that Oracle has had in its Q1s over the past three years, what makes
you feel differently with your guidance for this Q1 and the pipeline
you are seeing?

Could you contrast that versus this time last year, just to make people more comfortable with that 18% to 25% increase?

Safra Catz

Yes, I actually read your report begging us to be as conservative as possible. You know, the thing that weighs is that I have to be realistic. The volumes — and I mean not only size of deals, which isn’t the big driver, it is the number of deals between $0.5 million and $1 million; between $1 million and $5 million; between $5 million and $10 million and under $0.5 million.

All of these in the pipeline
are markedly so up that applying what we think to be realistic closure
rates, we should be within 18% to 25%.
Do I think we will be at 17%?
No. Do I think it will be much more than 25%? No.

So we really gave you the most realistic view, even though we took into account that we always have a very hard time in Q1 because it is a June/July/August quarter. We feel that that is where it’s going to come out.

Now, the thing we don’t know will be closure rates, and we keep getting surprised on the upside on closure rates, including in Siebel.

Later on in the call, Catz referred to the deal size as getting "chubby." As importantly, she maintained that Oracle assumed no improvement in Q1 deal closure rates from last year; despite the fact that a) last year's Q1 was a disappointment and b) close rates have markedly improved in recent quarters.

Any way you slice it, Oracle has laid down the gauntlet in the coming quarter. They've left themselves little wiggle room on license revenues; clearly explaining to the investment community that it's aware of prior year's inability to deliver on Q1 guidance. If they do deliver, it's yet another indication that Oracle may finally be delivering on the long-promised benefits of its multi-year M&A binge. If they don't deliver, given the ebullience on last week's call, it will put a major dent in the collective credibility of Ellison, Catz and Phillips going forward. The skeptics may continue to take a wait and see approach, but let's not forget that Oracle's Co-Presidents (Safra Catz and Chuck Phillips) are both seasoned sell-siders (Catz as an investment banker, Phillips as an II-ranked research analyst) and understand the importance of setting Street expectations.

Note: At the time of this writing I, and/or funds I maintain discretionary control over, maintained a long equity position in ORCL.

Source: Oracle Starting to Walk the Walk? F4Q Results Impressive (ORCL)