Oracle Reports A Strong Q2, Driven By Cloud Activities

| About: Oracle Corporation (ORCL)
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Summary

Perception that Oracle is late to the "cloud computing party" may start to dissipate.

Strong organic revenue growth in key divisions.

Despite heavy investment, margins and cash flow remain industry leading.

Geographically well spread portfolio, but Americas remain key.

Overview

Oracle (NYSE:ORCL) reported a robust second quarter with revenues and earnings at the top end of market expectations. Constant currency earnings grew by 5%, with total revenues ahead by 7%, primarily driven by ORCL's Software and Cloud activities. Trading at a 10-year valuation low to the S&P 500, these Q2 figures reaffirm my view that ORCL stock currently offers compelling value. I recently wrote an article proclaiming ORCL's fair value is approximately $55 per share and this article re-affirms that fair value.

Strong organic Software and Cloud revenue growth of 8% bodes well for the future

During Oracle's second quarter to November 2015, its Software and Cloud businesses delivered strong organic (constant FX) revenue growth of 8% to US$ 7.3bn, representing some 76% of total group revenues in the quarter. Key drivers of this strong growth came from a 41% increase in the revenues of Cloud software-as-a-service (SaaS) and platform-as-a-service (PaaS), plus a 62% increase in the revenues of Cloud infrastructure-as-a-service (IaaS), together delivering revenues of $516mm, up 45%. These strong growth rates augur well for ORCL's revenue growth outlook and may start to dissipate the stock market's perception that Oracle is late to the Cloud computing party, prompting a re-rating of the stock.

Industry leading margins and cash flow, despite heavy investment

Despite recruiting a further 7,600 specialized sales people and engineers in the quarter, Oracle's margins and cash flow continued to grow, which is very encouraging. Q2 operating margin was maintained at 37%, which highlights its highly profitable and cash generative characteristics of the company. I have updated my Levered Returns DCF model incorporating the Q2 earnings release.

Well balanced geographic mix

By geography, ORCL's business operations are spread across the globe and all geographies reported high single digit growth at constant FX (Americas 8%, Europe, Middle East and Africa 9% and Asia Pacific 7%), with the Americas still representing the Lion's share of ORCL's revenues (60%).

Conclusion

Overall, these Q2 figures confirm my view that Oracle is well positioned to deliver mid to high single digit constant currency earnings growth through FY'15, will buy back stock, and pay an increasing dividend. ORCL still remains cheap and recommend value investors buy at current prices.

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.