Oracle: Sell-Off Creates Long-Term Entry Opportunity

Mar.21.13 | About: Oracle Corporation (ORCL)

Shares of Oracle (NASDAQ:ORCL) are trading with sizable losses of up to 10% in Thursday's trading session. The provider of enterprise software, cloud-based services and computer hardware reported a disappointing set of third quarter results on Wednesday after the close. Investors are also disappointed with a poor revenue guidance for the fourth quarter.

Third Quarter Results

Oracle generated third quarter revenues of $8.96 billion, down 1% on the year before. Software revenues grew some 4% to $6.67 billion, while hardware revenues fell 16% to $1.24 billion. Service revenues also fell 8% to $1.04 billion. Revenues severely missed analysts estimates of $9.37 billion and Oracle's own guidance.

Revenues disappointed on a strong U.S. dollar, lower revenue conversion rates and an uncertain business environment as a result of the sequester discussions.

Despite the small drop in revenues, Oracle managed to boost operating income by 1% to $3.33 billion. The company managed to cut operating expenses by 2% to $5.62 billion.

Consequently, GAAP net income came in unchanged at $2.50 billion. Diluted earnings per share rose three cents to $0.52 per share as a result of a sizable share repurchase program over the past year.

Non-GAAP earnings per share came in at $0.65 per share, missing consensus estimates by a penny.

CEO and founder Larry Ellison commented on the developments at the company, "This month we will begin deliveries of servers based on our new SPARC T5 microprocessor: the fastest microprocessor in the world. The new T5 servers can have up to eight microprocessors while our new M5 system can be configured with up to thirty-two microprocessors. The M5 runs the Oracle database 10 times faster than the M9000 it replaces."

Looking Into The Fourth Quarter

Oracle expects somewhat of a re-bound in fourth quarter revenues, compared to the poor third quarter results. Total revenue growth is expected to come in between minus 1% and positive 4% compared to last year's revenues.

Non-GAAP earnings are expected to come in between $0.85 and $0.91 per share, up from last year's earnings of $0.82 per share. GAAP earnings per share are expected to come in between $0.72 and $0.78 per share, up 9% at the midpoint of the range compared to last year's earnings of $0.69 per share.

The revenue guidance of $10.84-$11.39 billion falls short of consensus estimates of $11.53 billion. The guidance for non-GAAP earnings came in line with expectations of$ 0.88 per share.

Valuation

Oracle ended its third quarter with $33.4 billion in cash, equivalents and marketable securities. The company operates with $19.8 billion in short and long term debt, for a net cash position of $13.6 billion.

For the first nine months of the year, Oracle generated revenues of $26.2 billion. The company net earned $7.1 billion over the time period, or $1.46 per diluted share. At this rate, the company is on track to generate annual revenues of approximately $37 billion. The company could earn around $10.5 billion for the year.

Factoring in the declines on Thursday, the market values Oracle around $154 billion. This values operating assets around $140 billion, or 3.8 times 2013's annual revenues and 13-14 times annual earnings.

Oracle normally pays a quarterly dividend of $0.06 per share, for an annual dividend yield of 0.7%. Note that the company pushed forwards dividends in time ahead of the fiscal cliff discussions in December of last year. As such, investors will only receive their first dividend in autumn of this year.

Some Historical Perspective

Long term holders of Oracle have seen decent returns over the past decade despite Thursday's correction. Over the past decade shares have almost tripled from levels around $10 in 2003 to current levels at $32. Shares peaked at $36 in 2011 and earlier this year in an attempt to re-test all time highs of $45, set back during the Internet bubble.

Between its fiscal year of 2009 and 2013, Oracle is on track to report an almost 60% cumulative increase in total revenues. Net income almost doubled from 2009's $5.6 billion to an expected $10.5 billion in the fiscal 2013. Earnings per share grew even quicker as the company retired roughly 5% of its shares outstanding over the time period.

Investment Thesis

Oracle posted a severe revenue miss in the third quarter, but there are some comforting circumstances for shareholders.

First of all, Oracle notes that its pipeline continues to grow. The company added more than 4,000 workers to its sales force over the past year and a half, thereby steadily growing its pipeline. The problem was the conversion of the pipeline into current sales, which continued to decline and is partially the result of the US sequester deadline.

Second, Oracle remains incredibly profitable. Net profits came in unchanged, while earnings per share grew on the back of share repurchases. Oracle's expense management is to be applauded given the 1% decline in revenues and the investments in the sales force.

Yet the slowdown is partially to blame to the company itself, and not just the external environment. While the company expects revenues to rebound in the final quarter, the outlook falls a little short of expectations.

At the same time the company continues to create value for shareholders by repurchasing its shares and continuing to make smart acquisitions. Over the past year, the company repurchased over $10 billion of its own shares, retiring roughly 7% of its total shares outstanding. Oracle furthermore continues to make smart acquisitions including last month's deal with Acme Packet (NASDAQ:APKT) which was applauded by the market.

Last month I concluded that Oracle continues to have long term appeal, but I did not see major potential for the short to long term. Despite the slowdown in revenues, which is only partially to blame to Oracle itself, the long term growth story remains intact.

Today's correction offers long term investors an opportunity to pick up some shares at discounted levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.