Some analysts were hoping the quarter would provide a greater upside surprise.
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Oracle shares are trading steeply lower Thursday after the enterprise-software giant posted February-quarter results. Though they beat Street estimates on some measures. the numbers left some investors disappointed with the pace of the company’s return to revenue growth.
As Barron’s outlined in a recent cover story, Oracle (ticker: ORCL) is making a big push to transform its business for the cloud-computing era. The company has built a public cloud business—Oracle Cloud Infrastructure—to compete with the likes of Amazon. com (AMZN), Microsoft (MSFT), and Alphabet (GOOGL). It is seeing smart growth for Autonomous Database, a cloud-based version of its flagship relational database software. And it is seeing strong demand for cloud-based enterprise applications, in particular Fusion ERP, financial software for large companies.
On the post-earnings conference call on Wednesday, chairman and founder Larry Ellison actually rattled off the names of 100 companies that had switched to Oracle’s Fusion ERP software from rival SAP’s ERP software. (Maybe Larry should tone it down a little.)
But Oracle still has a large base of legacy on-premises software business, and it will take time for the growth in the cloud elements of the business to overcome the legacy bits and drive growth higher. And some analysts were hoping the quarter would provide a greater upside surprise.
The fiscal third quarter results showed signs of progress—but not enough to please the Street after a recent sharp rally in Oracle shares. Revenue was $10.09 billion, up 3% from a year earlier, in line with the company’s forecast of 2% to 4% growth and slightly ahead of the Street consensus at $10.07 billion. Adjusted profits were $1.16 a share, up 20%, and ahead of the company’s forecast for profits of $1.09 to $1.13 a share.
Oracle also increased its quarterly dividend by 33%, to 32 cents from 24 cents, and announced a $20 billion expansion of its stock repurchase program. It said it bought back about $4 billion of stock in the latest quarter.
On the earnings call, CEO Safra Catz said the company expects May-quarter revenues to be up by between 5% and 7%, or between 1% and 3% in constant currency. She said Oracle expects non-GAAP profits for the quarter of $1.28 to $1.32 a share, or between $1.20 and $1.24 a share in constant currency. Catz also said that the company expects to spend aggressively in the May quarter to expand its Oracle Cloud capacity in preparation for strong demand in fiscal 2022.
Credit Suisse analyst Brad Zelnick notes that top-line results were weighed down by softer-than-expected results in hardware and services, smaller and less strategic elements of the business. “Several leading indicators, such as current remaining performance obligations (up 4%) suggest Q3 was a better bookings quarter that it was for revenue,” he writes in a research note. “The applications business appears poised for acceleration and Autonomous Database is likely to drive meaningful upside in fiscal 2022 and beyond. While some investors may be disappointed by Q4 margin guidance, continued capacity constraints reflect strong underlying [Oracle Cloud] demand and the need for incremental capital investment.”
Concludes Zelnick: “Looking through transition headwinds, we believe results bode well for the future.” He keeps his Outperform rating, and lifts his target price to $77 from $75.
Monness Crespi Hardt’s Brian White likewise repeated his Buy rating, while upping his target price to $92 from $83. “We believe Oracle offers investors a high quality, value play with the opportunity to capitalize on the company’s cloud transformation and increasingly attractive model,” he writes.
But other analysts had nits to pick. Cowen’s J. Derrick Wood maintains his Outperform rating and $77 target, but notes that revenue was below expectations on a constant-currency basis, and he says the constant-currency revenue guidance of 1%-3% likewise was softer that the Street had been expecting.
“While not the quarter and guidance we hoped for, we remain encouraged by strong ERP growth fundamentals, which we expect to continue,” Wood writes. “And the combination of strong [remaining performance obligation] growth and management now expecting a big jump in Q4 capex points to strengthening database backlog. While we think investors will be skeptical…we think this provides upside optionality.”
J.P. Morgan analyst Mark Murphy reiterates his Overweight rating, while upping his target to $73 from $68. He also pointed to disappointing constant-currency revenue growth, but sees offsets in strong bookings and cash flow, and notes “resoundingly bullish” comments from Ellison on both the competitive position versus SAP and the outlook for Autonomous Database.
Morgan Stanley’s Keith Weiss remains cautious on the stock, keeping his Equal Weight rating while lifting his target to $73 from $68. “Strong cloud momentum in back office applications and database tech still falls short of driving meaningful acceleration in total revenues,” he writes in a research note. “While a low multiple, share repurchases and a dividend increase keeps the value story intact, investors looking for a rebound story are likely disappointed.”
Weiss is particularly irritated by Oracle’s relatively low level of granular disclosure. “The reasons for the disconnect between strong Cloud growth and the lack of overall revenue growth remain hidden from investors by a notable lack of disclosure from the company,” he writes. “It is clear to us that there are still significant parts of the business in decline and weighing on overall growth, but without visibility into the relative sizing and growth trajectories of the growth versus declining businesses, investors are unlikely to give Oracle much credit for the bullish tone on the conference call, nor the advanced investments in the Cloud business.”
Oppenheimer’s Brian Schwartz likewise remains cautious, keeping his Perform rating. “While we commend the capital returns to the shareholders via buybacks and a higher dividend,” he wites, “we think Q3 results are unlikely to change the current narrative on Oracle, which is that the stock is cheap but the company is growth-challenged from multifaceted headwinds across the infrastructure business, and prioritizing capital-returns over R&D.”
Oracle shares are down 7.6%, at $66.64, in recent trading. The S&P 500 is up 1.1%.
Write to Eric J. Savitz at [email protected]
