Oracle Reports Earnings Early - End of June Swoon Quells Market IT Spending Fears

By Peter Bernstein June 19, 2012

Oracle’s CEO Larry Ellison is known for his brass knuckles approach and a penchant for the grand play. The company displayed a bit of the Ellison bravado on Monday releasing its fourth quarter earnings three days ahead of schedule. While the earnings release caught many Wall Street analysts by surprise – especially since many who cover the stock were following the Microsoft tablet premiere – the truth is there is no denying that good news is good news, and not just for Oracle, but for the tech sector in general.

Beating the Street

Surrounded by intrigue because of a report in the Wall Street Journal that key senior vice president of North America sales Keith Block had left the company due to incendiary instant messages that become public as part of a contract dispute with arch rival H-P and which questioned Oracle’s hardware business – from a public relations standpoint, this was a nice move. Oracle stock has been sliding for about three months because of macroeconomic concerns about IT spending in general and Oracle’s competitive position specifically.   The Block revelations were only causing more concern. However, performance that exceeds expectations has a funny way of curing what ails you.

Highlights of the results were as follows:

·         For the period ended May 31, Oracle reported net income of $3.5 billion, or 69 cents per share. This compared with net income of $3.2 billion or 62 cents per share for the same period last year. 

·         Earnings on a non-GAAP basis were $4.1 billion, or 82 cents per share. Revenue rose by 1% to $10.9 billion. The Street consensus had analysts expecting non-GAAP earnings of 78 cents a share on revenue of $10.89 billion.

·          Revenue from new software licenses rose by 37% to $3.98 billion, while hardware sales were up 9% to $977 million for the period.

·         If not for a stronger dollar, which hurt its results outside the U.S., Oracle said its revenue would have increase by 5 percent from the same time last year.

·         Software licensing revenue would have increased by 11 percent if currency exchange rates had remained at the same level as last year.

·         Oracle announced an extra $10 billion in share buybacks, a good sign since it usually translates into an earning boost in future quarters by reducing the number of outstanding shares.

·         The company also declared a quarterly dividend of 6 cents per share.

In a call with analysts to review the results, Oracle co-president Safra Catz said the company moved up its report “in an effort to permit us to speak more freely.”  What he clearly wanted to talk freely about was the results. 

Along with the items above, what also stands out is Oracle’s estimate that new software licenses will grow between 5-15 percent (without adjusting for exchange rate fluctuations) for the coming first fiscal quarter. Total revenue growth is expected to be between 3 -6 percent based on the same metrics.

What it means

As witnessed by the rise in the stock price in afterhours trading on Monday and the continued rise today, this was a shot in the arm for Oracle. More importantly, it gave a much needed boost to the IT sector worldwide. It temporarily relieved fears that IT professionals may have been and could cut spending in the face of economic uncertainties. The Oracle results contradict that view, including indications that things in troubled Europe do not appear a catastrophe. The bottom line is that when the world’s number three software company says things were good and look ok investors rejoice. 

The icing on the cake if you are an Oracle investor came in a few flavors. First, investors focus on sales of new software licenses because that means downstream revenues from maintenance and software upgrades. While Oracle cautioned that software licenses for the current quarter could range from a 1 percent decrease from the same time last year to a 9 percent increase, clearly part of the stock appreciation so far is a view that they will trend to the high side. Second, in a period of smart money chasing safer harbors and decent prospects, the buyback and dividend announcement are music to fund managers’ ears.

Is everything wonderful in Oracle land? In short, no! 

One thing that is problematic is whatever the results may be from all of its ongoing intellectual property litigation, particularly its nasty spat with Google over the IP related to Android. Possibly bigger are the questions raised by Block about Oracle’s inability to have a hardware strategy that is profitable. Now two years into its acquisition of Sun Microsystems, hardware sales are declining in big hardware, and while the company has grand visions for the cloud area that make sense, how it handles the roiling personal device market and relationships with ecosystems in the mobility and customer experience spaces remains work to be done.

At least for the short term the IT sector should begrudgingly tip their hats to Oracle. They gave world markets a belated but needed post-Father’s Day present. We shall see how long the luster lasts. 

Edited by Allison Boccamazzo
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