Oracle Returns To (Some) Growth

| About: Oracle Corporation (ORCL)

Summary

Forward revenue estimates rose, while forward EPS estimates were revised lower.

Might the PAAS/SAAS margins be crimping earnings growth?

Still, expect low- to mid-single digit revenue and earnings growth for the coming quarters, which would be better than the last two years.

Just a quick note after Oracle (NASDAQ:ORCL), the database software giant, reported its fiscal Q4 '16 financial results after the bell on Thursday night, June 16th.

While it had a nice beat on revenue estimates, the database giant missed by $0.01 on the consensus EPS estimate and looked to have guided to a "constant currency" $0.56-0.60 earnings per share range for Q1 '17, versus a consensus estimate of $0.59, which, in management speak, gives the Street a wider band for the lower end of the range.

Oracle (the stock) rose 2.7% on 3(x) average volume on Friday, June 17th, despite the tepid EPS guidance.

For readers who have followed my write-ups on Seeking Alpha for many years, I like to dig into the numbers, and when a company sees forward revenue revisions move higher (typically a good sign) but forward EPS revisions move lower, it means there is an issue with margins or, more typically, operating expenses.

This may not be a longer-term issue for Oracle, since reducing expenses is always under management control (as opposed to revenue generation, which requires the customer or client to say "yes"), but I thought I'd raise the point for readers anyway.

The earnings preview written for readers (I thought) did a good job of identifying the company's core issues, and Oracle management addressed this in the conference call by saying that "the dollar growth in SAAS/PAAS will be greater than the dollar loss or decline from the license applications segment", from which the reader can infer that the company will continue to grow, but there are these headwinds to the business right now.

The company's disclosure around its quarterly financials is quite good (in my opinion), and Cloud revenue as a percentage of Oracle's total revenue is now 8% as of May '16 and is growing about 1% per quarter (as a percentage of Oracle's total revenue).

Some analysts think the Cloud business has now hit "scale" - I'm not so sure, but it may not matter, since it will get there eventually anyway.

A could things are clear after the Oracle report last week:

1) Oracle is now growing again, at least in the low single digits, after a tough year last year.

2) Expectations are low, which I always like to see, since it presents a better risk / reward for readers who can be longer-term investors.

3) New software license application sales should continue to slide, but for the next 3-4 quarters, the software giant faces easier compares.

4) Although my own valuation remains unchanged for now, given the EPS revisions, finbox.io did an Oracle analysis which they sent me after the earnings preview (above) was done, and they have a "high $40s" fair value on Oracle, which would be consistent with how the stock traded "pre-Cloud". If Oracle sees some "P/E expansion", the stock could definitely get there, but I think a better tape for large-cap tech is needed, and EPS revisions need to follow revenue revisions.

Conclusion

This transition to the Cloud for Oracle is driving new revenue growth, but the depressing effect on the new license applications business is offsetting some of the Cloud impact.

In my opinion readers need a 1-2 year holding period for the stock to outperform here, and I'm willing to sit on Oracle for that time period, although positions can change at any time.

Disclosure: I am/we are long ORCL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.