Oracle Earnings Preview

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About: Oracle Corporation (ORCL)
by: Shock Exchange
Summary

ORCL reports quarterly earnings Thursday.

Another quarter of flat revenue growth could hurt sentiment.

Its current pace of share buybacks could be untenable.

Sell ORCL.

Oracle CEO Safra Catz Oracle CEO Safra Catz. Source: Forbes

Oracle (ORCL) reports quarterly earnings Thursday. Analysts expect revenue of $9.6 billion and EPS of $0.84. The revenue estimate implies flat growth sequentially. Investors should focus on the following key items:

Growth Appears Dead

Oracle provides services that address various aspects of a company's information technology environment - application, platform, and infrastructure. Revenue from its cloud offerings had been growing at double digits, while On-Premise software had been growing in the low single digits. The company jump-started growth with its $9 billion acquisition of cloud services company NetSuite in late 2016.

For a while Oracle feasted off the NetSuite deal and upgrades and subscription fees for its legacy business. That may have come to an end last quarter after total revenue of $9.6 billion was flat Y/Y.

Oracle revenue growth

Cloud Services and License Support revenue was up 3%; every other operating segment experienced a revenue decline. This performance mirrored the result for the quarter-ended August 2018. Cloud Services and License Support represented about 69% of total revenue. The bulk of this revenue is recurring and provides Oracle a solid moat.

Oracle's revenue may not fall off a cliff, but it likely will not grow either. Over 30% of its revenue is falling by low single digits. It is difficult to recommend a stock with flat to declining revenue growth. A dismal top line could hurt sentiment for ORCL long term.

What Levers Will Oracle Pull?

Despite dismal top line growth, management still has levers to pull. The company has nearly $6.5 billion of operating expenses it can cut into. Last quarter, operating costs fell by 1%, offsetting flat revenue growth. This allowed Oracle to grow operating income by 2% Y/Y. Cutting operating costs by more than the decline in revenue could continue for several quarters.

Expenses for Cloud Services and License Support (15% of total operating costs) rose 7%. Other costs were pretty well-contained. Hardware costs fell by 5% and general and administrative costs were down 7%. Restructuring costs were $143 million, down over 50% Y/Y. I expect management to further reduce these expense items in the upcoming quarter. Generating earnings growth from a reduction in restructuring costs could call into question the quality of Oracle's earnings. However, I expect management to slowly cut operating costs for several more quarters. This represents an important lever for Oracle.

Is Oracle Ruining Its $49 Billion War Chest?

Oracle currently has cash and marketable securities of $49 billion. This war chest could be used to acquire other technology companies, assuming the price is reasonable enough to provide Oracle with an attractive return on investment. It could potentially goose growth similar to the NetSuite deal. With the incessant melt up in financial markets, it could be difficult to find attractive deals and put that capital to work.

Instead, Oracle has engaged in share repurchases. Free cash flow for the first six months of the fiscal year was $6.5 billion, which equated to a $13 billion annual run-rate. The company bought back nearly $20 billion in stock over the past six months as well, which equates to a $40 billion run-rate. I find it difficult to believe the company can continue this pace of buybacks. Certain analysts recently downgraded ORCL, citing unsustainable buybacks. If previous buybacks have helped goose EPS, then a reduction of those buybacks could remove an important catalyst.

Conclusion

ORCL is up less than 1% Y/Y. Flat revenue growth could make it difficult to get excited about the stock. Sell ORCL.

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.