December was a busy month for Oracle (ORCL). On December 18, the tech giant reported fiscal second-quarter results that showed non-GAAP revenue advanced 2% (up 3%, excluding the impact from the strengthening US dollar). Non-GAAP new software licenses and cloud software subscription revenues fell modestly (though it annualized at a high-teens growth rate in the year-ago period), while non-GAAP new software license updates and product support revenues jumped 6%. Hardware Systems revenues, including hardware systems products and hardware systems support, were essentially unchanged.
Non-GAAP operating income fell modestly on a still-very-healthy non-GAAP operating margin of 46%. Non-GAAP net income nudged 1% higher, but share buybacks bolstered non-GAAP earnings per share expansion to 9%, excluding the impact from a strengthening US dollar. The company generated GAAP operating cash flow of $15.2 billion on a trailing twelve-month basis - the first time Oracle has ever reached the $15+ billion mark. At the end of the quarter, Oracle held $37 billion in cash and marketable securities compared to roughly $24.2 billion in short and long-term debt. Looking ahead, the firm issued an in line outlook for the fiscal third quarter:
"New software license and cloud subscription revenue is expected to range from 2% to 12% in constant currency and 1% to 11% in reported dollars. Hardware product revenue growth is expected to range from a negative 1% to a positive 9% in constant dollars and negative 2% to a positive 8% in reported dollars. As a result, total revenue growth on GAAP and non-GAAP basis is expected to range from 3% to 7% in constant dollars and 2% to 6% in U.S. dollars. Non-GAAP EPS is expected to be somewhere between $0.68 and $0.72 in constant and reported dollars. GAAP EPS is expected to be somewhere between $0.54 to $0.58 in constant dollars and in reported dollars. Now, this guidance assumes a GAAP tax rate of 23% and a non-GAAP tax rate of 24%, and of course that may end up being different."
Though Oracle's outlook was certainly welcome, the biggest news came with the announcement that it had entered into an agreement to acquire Responsys (MKTG), a leading provider of enterprise-scale cloud-based B2C marketing software for $27 per share in cash or approximately $1.5 billion. Responsys is used by B2C firms to manage marketing interactions across email, mobile, social, display and the web. It remains to be seen whether SAP (SAP) will make a counter offer, but if the entity eventually ends up in the Oracle umbrella, it will significantly bolster the firm's Customer Experience Cloud offering. Both Salesforce.com (CRM) and Adobe (ADBE) recently reinforced their positions in the cloud, picking up ExactTarget and Neolane, respectively.
Oracle put up its best trailing twelve-month operating cash flow measure in history when it posted fiscal second-quarter results December 18. The company's outlook was welcome news, and the bolstering of its Customer Experience Cloud offering via its acquisition of Responsys has improved its competitive position and growth prospects. We think shares of Oracle are worth more than $40 each, representing modest upside to its current market price at the time of this writing. Though its dividend yield isn't as high as a few of its tech giant peers, the prospect of substantial dividend growth at Oracle is strong. Our best ideas continue to reside in the Best Ideas portfolio and Dividend Growth portfolio.