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Enterprise hardware and software maker Oracle (NYSE:ORCL) ended its fourth quarter with the same lackluster revenue and earnings growth that it posted in the previous quarter. Revenue was flat year-over-year at $11 billion, falling short of consensus estimates. Earnings also fell short of consensus expectations, but grew 5% year-over-year to $0.87 per share on a non-GAAP basis. Earnings per share were helped by management repurchasing $2.8 billion worth of shares during the fourth quarter. Even though top- and bottom-line numbers were weak, Oracle remains a cash machine, generating $13.6 billion in free cash flow for fiscal year 2013 - this is 36.6% of annual revenue of $37.2 billion!

Yet again, the issue with Oracle remains its hardware and services businesses. Hardware revenue declined 9% year-over-year to $1.4 billion. Still, a 9% decline was much better than the 22% dip the firm experienced in the third quarter. CFO Safra Catz remarked on the conference call:

"…I think we may have just seen the last of annual hardware revenue declines, which will have positive implications for total revenues."

Even though the segment was weak in fiscal year 2013, gross margins were strong at 51%, and management indicated that some acceleration in the business will help lift gross margins to the upside. Services revenue also declined 9% year-over-year to $1.1 billion. We think the business could also recover in fiscal year 2014.

Oracle's software segment performed much better, with revenue increasing 4% year-over-year to $8.4 billion. President Mark Hurd claimed Oracle's cloud software was now the number two player in the space, trailing only Salesforce.com (NYSE:CRM) but beating out competitors SAP (NYSE:SAP) and Workday (NYSE:WDAY). Hurd could barely contain his excitement about the number of deals the firm signed in the fourth quarter and the size of its robust deal pipeline. However, such enthusiasm failed to translate into results, as revenue from new software licenses and cloud subscriptions rose just 1% year-over-year. Still, CEO Larry Ellison foreshadowed some positive announcements about partnerships with competitors, saying:

"Again, I would call them a startling series of announcement with companies like Saleforce.com, NetSuite, Microsoft all that happen next week will give you the details. These partnerships in the cloud I think will reshape the cloud and reshape the perception of Oracle Technology in the cloud. 12c in other words is the most important technology we've ever developed for this new generation of cloud security."

Oracle wants to be a dominant force in the cloud, but it seems like the company just isn't there yet. We think Ellison could look to purchase Salesforce.com within the next couple of years if Oracle's products fail to gain sufficient traction.

Looking ahead, management anticipates earnings of $0.56-$0.59 per share on a non-GAAP basis for its first-quarter of 2014, driven by revenue growth of 2-5%. Both figures were roughly in-line with Street guidance, but the ranges might be a little lower than investors were expecting.

Valuentum's Take

By no means was Oracle's fourth-quarter revenue performance satisfactory. Revenue was flat for the full year. However, the firm generated a tremendous amount of free cash flow, and we think the company will aggressively return cash to shareholders. In fact, Oracle doubled its quarterly dividend to $0.24 per share and announced an authorization to repurchase $12 billion of stock.

Oracle isn't a growth company anymore, but it certainly is a cash machine. Shares now look cheap on the basis of our discounted cash-flow process (after the fall today), but we already have sufficient exposure to technology in the portfolio of our Best Ideas Newsletter. We won't be looking to add shares of Oracle at this time.

Source: Oracle Posts A Weak Quarter, Is Salesforce.com A Target?