Oracle Projects Slower Earnings Pace

| About: Oracle Corporation (ORCL)

Summary

Earnings estimates are an average of $0.78 per share by the analysts and $0.80 by Oracle management. This is a -3.7% and -1.2% YoY decrease, respectively.

A small YoY decrease in revenues (-1.4%) is projected by the analysts from $10.60 billion to $10.45 billion.

ORCL stock has been in a long-term uptrend and is up about 17+% for both 2017 YTD and the past 12 months.

Earnings per Share

Oracle (NYSE:ORCL) reports earnings for the quarter ending May 2017 on Wednesday, June 21, after market close. The analysts expect CEOs Mark Hurd and Safra Catz to report a slower quarter, with a YoY decrease in Non-GAAP earnings per share (-3.7%) and a YoY decrease in revenues (-1.4%). The Oracle management outlook is slightly better at -1.2% and +0.50%, respectively.

The average estimated Non-GAAP EPS of $0.78 by analysts is a small decrease of -3.7% YoY but higher than the four-quarter earnings per share average through QE February 2017 of $0.67. Non-GAAP earnings per share have been $0.69, $0.61, $0.55, $0.81 for the past four quarters, in reverse chronological order.

The quarters ending in May have historically been an annual cyclical peak for Oracle earnings per share, with the QE May 2014 the pinnacle at $0.92. The QE May 2013 was second highest at $0.87. The pace slowed with the QEs May 2015 and 2016 reported at $0.78 and $0.81, respectively. The chart below shows the lower annual cyclical peaks.

Estimated QE May 2017 Earnings per Share (Non-GAAP):

  1. Analyst Estimates: $0.78 avg, $0.77 low, $0.80 high, 32 analysts
  2. Prior Year $0.81 = -3.7% YoY
  3. Prior Quarter $0.69 = +13% QoQ
  4. Oracle Management Outlook $0.78 to $0.82 = -3.7% to +1.2% YoY

Earnings per Share Year Over Year Growth Rate (%)

The estimated Non-GAAP earnings per share average of $0.78 for the QE May 2017 is a decrease of -3.7% year over year. The most recent four-quarter average is a more respectable, but still slow, +3.1%. Cisco has had 1 YoY decrease in the past 4 quarters, after a prior run of 4 consecutive YoY quarterly decreases. The prior 2 quarters even before that were 0.00%. The chart below is not encouraging but does show overall improvement since the QE May 2015.

Revenues

Total revenues have averaged $9.39 billion for the past four quarters. An increase to $10.45 billion is projected for this next QE May 2017. This would be the lowest total revenues for an annual cyclical peak since the QE May 2010 ($9.51 billion).

The quarter ending in May has historically been a cyclical peak for Oracle revenues, with the QE May 2014 the pinnacle at $11.33 billion. The QE May 2013 was second highest at $10.96 billion. The pace slowed with QEs May 2015 and 2016 reported at $10.71 billion and $10.61 billion, respectively. The chart below shows the lower cyclical peaks.

Estimated QE May 2017 Revenues (GAAP & Non-GAAP):

  1. Analyst Estimates: $10.45B avg, $10.32B low, $10.64B high, 30 analysts
  2. Prior Year $10.60B = -1.4% YoY
  3. Prior Quarter $9.27B = +12.7% QoQ
  4. Oracle Management Outlook $10.49B to $10.81B = -1.0% to +2.0% YoY

Revenues by Segment

Quarterly revenues by segment are comprised of Software (67%), Cloud (13%), Hardware (11%), and Service (9%). Oracle management envisions the future as a cloud company. Co-CEO Safra Catz stated in the prior earnings call for the QE February 2017, "Our pivot to the cloud is now clearly in full strength." As can be seen in the chart below, the Software segment continues to dominate the revenue mix. However, the annual cyclical peak for QEs in May for Software has been in a downtrend.

Revenues by Region

Quarterly revenues by region are comprised of the Americas (54%), Europe, Middle East, Africa (31%), and Asia Pacific (15%). This revenue mix is little changed over the years and shows the cyclical peak for quarters ending in May.

Return on Assets & Margins

Because Non-GAAP earnings are higher than GAAP earnings, the return on assets is also higher. What is interesting is that both Non-GAAP and GAAP return on assets are declining, which indicates a less efficient deployment of assets. Net margins for both Non-GAAP and GAAP have been in a slow downtrend.

Conclusion

Financial Performance: Non-GAAP & GAAP financial performance has slowed from both a cyclical peak and a pinnacle for the QE May 2014. At that time, Non-GAAP EPS was $0.92 and total revenues were $11.33 billion. By comparison, analysts project an average EPS of $0.78 and $10.45 billion for this next QE May 2017.

Pivot to the Cloud: As noted earlier, Co-CEO Safra Catz has clearly indicated that the cloud is the future for Oracle. She also stated in the prior earnings call, "Next year I expect our cloud revenue will be larger than our new software licensing revenue. The investments we've made to transition our business to the cloud has been important to ensure Oracle remains a technology leader and we're now beginning to see the benefits in our results."

Financial Position: Financial position is adequate with a capital to assets ratio of 41%. Total assets of $125 billion and working capital of $50 billion are record highs. The current assets to total assets ratio is 53%, so there is liquidity. The total debt ratio, both short-term and long-term, is a very high at 43% of total assets and has been at this level for 3 quarters.

Dividends: Oracle declared a record-high dividend of $0.19 on March 15, payable April 26, for stockholders of record April 12. At a selected benchmark $45.00 stock price this is a 1.69% annualized yield. The dividends paid for the past four quarters have been $612M, $614M, $618M, $623M, in reverse chronological order.

Stock Repurchases: Oracle repurchased $498 million of common stock in the QE February 2017. These repurchases, combined with the $612M dividends equal $1.11B earnings returned to shareholders. The repurchases for the past four quarters have been $498M, $567M, $2.002B, $1.973B, in reverse chronological order.

Stock Price: ORCL stock has been in a long-term upward trend. ORCL does have price support from the dividends paid, dividend yield, stock repurchases, and institutional buyers. Any lower price, and therefore higher dividend yield, will provide support. The stock beta is a low 1.11, so there normally isn't much volatility.

Stock Evaluation & Opinion: As an intermediate-term to long-term investor, and from that perspective, I consider Oracle stock to be a Hold, compared to Buy or Sell. I am Neutral on Oracle stock, compared to Positive or Negative. Long-term will hopefully have better prospects, but that has not been proven yet. The quarters ending in May are the annual cyclical peaks for top line revenues and bottom line earning per share. The pinnacle of these financial performance indicators was reached for the QE May 2014 and have not been regained since.

(Graphs created by author using data from Oracle. Time frames generally are intermediate-term = 1-3 months and long-term = 3+ months for purposes of the above discussion.)

Disclosure: I/we 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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Tagged: , Application Software, Earnings
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here