Oracle Guides Lightly While Ellison Sails

| About: Oracle Corporation (ORCL)

Enterprise tech giant Oracle (NASDAQ:ORCL) posted modest results for its fiscal year 2014 first quarter that were mostly in-line with the company's prior guidance. Revenue increased 2% year-over-year to $8.4 billion, a touch below consensus estimates. Earnings-per-share on a non-GAAP basis was 12% higher than the year-ago period at $0.59. Free cash flow for the quarter was phenomenal at $6.1 billion, equal to 73% of revenue. CEO Larry Ellison was notably absent from the conference call as he sails in America's Cup.

Software Drives Revenue Expansion

Hardware revenue was weak, with product sales falling 14% year-over-year to $669 million (hardware systems support revenue, however, advanced a modest 3% year-over-year to $592 million). President Mark Hurd downplayed the weak results, saying Oracle was more focused on "high Oracle content" products, implying that poor hardware results don't appropriately reflect the business.

Software, on the other hand, was reasonably strong, growing 6% year-over-year (8% excluding currency) to $6.1 billion. The strength was driven by solid performance from software license updates and support (up 7% year-over-year) and new software licenses and cloud subscriptions (up 5% year-over-year). Even if hardware struggles, the free cash flow generated from software far exceeds that of hardware.

Margins Were Fantastic

President and CFO Safra Ada Catz summarized how Oracle feels about margins succinctly, saying:

"Our non-GAAP operating income was $3.7 billion, which was 6% higher than last year, and operating margin expanded to 45%. We still believe there remains ample leverage in the business model."

As Catz said, non-GAAP operating margins were 45% during the period, simply a fantastic number for any company, especially one with as much revenue as Oracle.

Guidance

Looking ahead, Oracle offered fairly broad guidance for its second quarter of fiscal year 2014, calling for new software license and cloud subscription revenue growth to be in the range of -4% (negative 4%) to +6% year-over-year, hardware product revenue expansion to be -9% (negative 9%) to +1% year-over-year, driving total revenue growth of 1%-4% in constant currencies and -1% to +2% in reported dollars. Reported non-GAAP earnings per share are expected to be between $0.64 and $0.69 during the period. Both figures fall below consensus estimates, but we don't think the outlook is too bad.

Valuentum's Take

Though revenue growth at Oracle remains subdued, free cash flow generation does not. Shares currently trade at the low-end of our fair value range, but we prefer Microsoft (NASDAQ:MSFT) due to its strong enterprise presence and huge return of capital to shareholders. Microsoft is held in our Dividend Growth Newsletter portfolio.

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.

Additional disclosure: MSFT is included in the portfolio of our Dividend Growth Newsletter.