Oracle Remains A Buy For Portfolio Builders

Jul. 9.13 | About: Oracle Corporation (ORCL)

Shares of Oracle (NASDAQ: ORCL) recently fell in after-hours trading following the release of its fourth-quarter earnings that showed disappointing sales figures. What does this mean for investors interested in Oracle stock? Should they still put their money into Oracle or look at other investment prospects?

The Disappointing News

Oracle's Q4 FY 2013 earnings report painted a mixed picture of the financial condition of the company. On the one hand, profits increased by 10% to $3.81 billion from $3.45 billion in the same quarter last year. This brought diluted earnings per share to $0.80 from $0.69. However, sales growth was flat, increasing just 0.28% to $10.94 billion from $10.91 billion in the same quarter last year. Although earnings per share exceeded analysts' expectations of $0.75, sales were a letdown at expectations of $11.1 billion.

Even more worrisome was unsatisfactory growth for revenues from new software licenses and cloud software subscriptions, which increased by just one percent to $4.03 billion from $3.99 billion in the same period last year. This caused concern among analysts since new software licenses are one of the major indicators of the company's future revenues. Share prices were also affected by the mixed results of the earnings report. Just before the release of the report on June 20, Oracle shares closed at $33.21, 88 cents lower than the previous day's closing level of $34.09. Following the release of the report, share prices lost $3 to close at $30.14.

When considered on a year-to-year basis, however, revenues from new software licenses went up 4% for FY 2013 to $10.32 billion from $9.91 billion in FY 2012. This helped increase profits by 9% to $10.93 billion from $9.98 billion. However, growth of total revenues remained flat as they grew less than one percent to $37.18 billion from $37.12 billion in the previous fiscal year.

What Oracle Has Going for It

One of the biggest threats to Oracle's continued profitability is the intense competition in the market from rivals offering comparable services. Oracle made its name from the sale of database software and hardware, but has been trying to adjust to changes in technology by making inroads into cloud-based service solutions. In late 2011, the company bought RightNow Technologies, a provider of customer relationship management services and call-center automation, for $1.5 billion, and Taleo, a provider of cloud-based talent management solutions, for $1.9 billion. It also acquired cloud software authority Eloqua Software in late 2012 for $810 million in a bid to boost its 'Customer Experience Cloud,' as well as the social marketing software service company Vitrue in May. These acquisitions serve to highlight Oracle's determination to compete by focusing on cloud computing solutions and applications.

However, this does not mean that Oracle is abandoning its core database software business, where it maintains market dominance. According to research company Gartner, Oracle remains the market leader in the database software market, with a revenue share of 48%, larger than the combined shares of competitors IBM (NYSE: IBM), Microsoft (NASDAQ: MSFT), Teradata (NYSE: TDC) and SAP (NYSE: SAP). This has helped Oracle to maintain its profitability, as shown by the high level of operating cash flows the company continues to generate. For FY 2013, the company generated some $14.22 billion in operating cash flows, up 3.5% from the $13.74 billion reported in FY 2012. In addition, during the past eight years, operating cash flows have increased by an average 19% annually.

Oracle has not been hesitant to return its cash windfall to its shareholders. The company returned over 90% of its operating cash flow for the fiscal year to its investors in the form of share buybacks and dividends, even as it increased the total cash and marketable securities on its balance sheet to $32 billion. For Q4 FY 2012, the company repurchased some $2.8 billion of its shares under its existing repurchase program and authorized the repurchase of an additional $12 billion of common stock in upcoming quarters. In addition, the board of directors doubled its quarterly cash dividend to $0.12 per share, from its current $0.06 per share. This dividend increase brings Oracle's yield to 1.6% from its previous level of 0.07 percent.

The company also recently announced that it would trade its common stock on the NY Stock Exchange under its current ticker, since it believes the transfer would be in the best interests of its shareholders.

The Bottom Line

Although Oracle will continue to confront challenges from new technologies and smaller players who are eroding its business at the margins, there is no reason to believe that it will not continue to remain profitable, even if it fails to grow. The company is still the dominant force in the computer technology industry and their software is still being used by every Fortune 100 company, which provides it with a steady stream of revenue as evidenced by software license renewal rates of 95 percent. Hence, investors looking for stocks that will provide them steady cash flow that they can reinvest. In addition, many analysts believe that Oracle shares are undervalued since the company continues to have strong long-term prospects, meaning that share prices would still have plenty of room to appreciate.

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.