Oracle: Sell-Off Is An Overreaction Given The Comforting Outlook

| About: Oracle Corporation (ORCL)


Investors punish Oracle for "disappointing" cloud numbers.

Despite solid growth, Oracle has a long way to go as the cloud operations are still very modest in size.

Investors should find comfort in the guidance, the rock solid balance sheet and fair valuation.

Oracle (NASDAQ:ORCL) released its fourth quarter results on Thursday after the market close. The numbers fell short compared to the expectations of investors.

Investors were hoping for a better performance of the company's still modest cloud operations. This triggered a sell-off in after-hours trading which is a bit of an overreaction in my opinion given the comforting first quarter outlook.

I'm a buyer if a correction takes the stock just a little lower in the coming days or weeks.

Fourth Quarter Headlines

Oracle reported fourth quarter revenues of $11.32 billion which is up by 3.4% compared to the year before. Analysts were looking for revenues of around $11.48 billion.

Reported net earnings were down by 4.2% to $3.65 billion. Thanks to share repurchases, earnings per diluted share came in unchanged at $0.80 per share.

Non-GAAP earnings totaled $0.92 per share, falling four cents short compared to consensus estimates.

Looking Into The Numbers

Cloud is the key word and it is the driver behind the modest revenue growth. Cloud SAAS and PAAS revenues were up by 25% to $322 million while cloud infrastructure revenues rose by 13% to $128 million. Running at a rate of nearly $2 billion per annum, revenues still make up less than 20% of annual profits.

Unfortunately results were not so spectacular at the core business. Net software licenses were stable at $3.77 billion, while software license updates rose by a solid 7% to $4.69 billion. The soft new licenses will not bode well for long-term software license updates, unfortunately.

Total hardware sales rose by 2% to $1.47 billion as service revenues were down by 4% to $940 million.

So far relatively good news. Operating expenses rose by 8% to $6.41 billion. This is largely related to $20 million in acquisition-related expenses which yielded a $257 million benefit last year. Other than that, costs were still up predominantly as sales and marketing expenses as well as R&D expenses rose by 6 and 7%, respectively.

As a result, reporting operating earnings were down by 2% to $4.91 billion. Slightly higher interest expenses as well as other items impacted reported earnings. Among these items was the $200 million impact from the devaluation of the Venezuelan currency. As mentioned above, falling earnings have been offset by a reduction in the share base.

Valuing Oracle

The company keeps adding to its war chest, ending the quarter with $38.8 billion in cash, equivalents as well as marketable securities. Total debt rose to $24.2 billion, resulting in still a solid net cash position of $14.6 billion.

Annual revenues for the past year were up by 3% to $38.3 billion with net earnings coming in virtually exchanged at $11.0 billion.

At $40 per share, equity in the firm is valued at $183 billion which values operating assets at about $168 billion. This values Oracle at 4.4 times annual revenues and 15-16 times earnings.

Oracle's quarterly dividend of $0.12 per share provides investors with a 1.1% dividend yield.

Looking Into The Fiscal 2015

For the current first quarter, Oracle is expecting earnings to come in at $0.49-$0.53 per share on a GAAP basis. On a non-GAAP basis, earnings are seen between $0.62 and $0.66 per share, with the discrepancy being driven by share-based compensation and amortization charges.

Revenues are seen up between 6% and 8%, driven by software and platform cloud services which are seen up 25 to 35%. As such revenues might come in close to $9.0 billion. Consensus estimates for first quarter revenues stood at $8.78 billion. The earnings guidance was largely in line with consensus estimates which were looking for earnings of $0.64 per share.

Cloud Is Investors' Worry

The great success of firms like (NYSE:CRM) and start-ups in the wider field of cloud-based solutions have pressured Oracle to quickly turn itself into a cloud provider as well.

Investors have been hoping a quicker pace of growth in its cloud activities even as the company reported the steepest growth rate for 2014 in the final quarter. The shift to monthly or annual software subscriptions hurts upfront revenues as Oracle typically charged all the proceeds upfront. For an established firm like Oracle, the move is substantial with huge accounting implications as well as consequences for its sales force.

To reignite growth, analysts are pressuring Oracle to make more dramatic moves. Earlier this week shares of MICROS Systems (NASDAQ:MCRS) jumped on Tuesday following reports that Oracle was willing to make a roughly $5 billion bid for the company. A potential move could add nearly $1.3 billion in annual (and solidly growing) revenues by acquiring the enterprise information solutions provider for the hospitality and retail industry.

Final Takeaway

Investors are shocked, but I continue to see cloud growing at even accelerated growth rates. As such I believe this is a classical case in which expectations have run-up too high in anticipation of the earnings report after shares have risen 11% year to date.

The comforting outlook, notably in cloud revenues, should alleviate real concerns about the short-term cloud performance. What's clear is that despite impressive growth rates growth can always be quicker and the contribution is still very limited compared to the overall business. Undoubtedly potential future deals, as well as new products like the new 12C in memory database products, will be key going forward.

Given the continued growth, rock solid balance sheet and focus on operations in the cloud, I would still be comfortable holding Oracle for the long term. The latest pullback, and hopefully a larger retreat toward $36-$38 per share, would provide me with an excellent entry point.

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