Oracle (ORCL) reported fiscal first-quarter earnings
tonight after the close that missed estimates for both
the top and bottom lines. Software and hardware missed
consensus estimates with their margins being the clear
miss. This was partially offset by stronger-than-expected
revenues in its cloud results, higher deferred revenue
and record cash levels. The company also announced a new
$13 billion buyback program and now has $15 billion in
But the real headline is that long time CEO Larry Ellison
will step down from his position to become executive
chairman. He will take on the role as the head of
technology. Ellison co-founded the company and has run it
since 1977. He turned 70 last month.
The current co-Presidents, Mark Hurd and Safra Catz, will
become co-CEOs of the company. Hurd runs sales, marketing
and support and Catz is in charge of financial and legal
operations. Catz will remain CFO at the firm.
The company downplayed the changes on the conference call
(saying there will be “no meaningful changes” in the day-
to-day operations) but we think the move makes sense. The
company is undergoing a big transition away from the
legacy hardware exposure and toward the faster-growing
The shares are down 2% on the news but trading at 12.8x
forward estimates. Expectations are very low and the new
buyback should be supportive to the shares. More
importantly, while Ellison is removing himself from the
day-to-day CEO responsibilities, he will remain involved
on the technology side. This is important not only
because of his extensive expertise but also because it
also gives the company a fresh start by allowing these
two managers to drive business and growth.
The way we see it, Oracle is about two years behind
Microsoft (MSFT) and Adobe (ADBE) in the cloud
transition. The company missed the early trend entirely
so it is now playing catch-up. We think management can do
it -- the market is large enough and Hurd and Catz have
credibility on the execution front. But it will take
The first quarter is seasonally the company’s slowest and
smallest of the year. But the results were not inspiring
other than cloud. Earnings were $0.62 vs. the $0.64
consensus and at the low end of the $0.61-$0.65
projections on a constant currency basis from
management’s guidance. Revenues also missed consensus
estimates of $8.6 billion. They were up 3%, year over
year, vs. the $8.85 billion expectation and they came in
at the low end of the company guidance of 3%-5% constant
Software + cloud totaled $6 billion in revenue and rose
6%, which was in the middle of the 5%-7% constant
currency guidance. This was slightly lower than the $6.6
billion consensus estimate, but we view the cloud
component as encouraging. Software as a service (SaaS)
and Platform as a Service (PaaS) cloud revenue rose 32%,
year over year, to $337 million, which was ahead of the
$333 million consensus estimate. Infrastructure as a
service (IaaS) cloud revenue was up 26% to $138 million
and also better by $10 million.
The company added 500 new customers in cloud.
Unfortunately, this is a small segment in the software
division and needs to get meaningfully bigger to move the
needle. Mergers and acquisitions (M&A) come to mind, we
expect this to be a bigger focus for the firm in the
future. It’s worth pointing out that after the close, SAP
(SAP) announced the acquisition of Concur Technologies
(CNQR) to beef up its cloud offering.
Hardware was a disappointment, coming in at $1.2 billion
and below the $1.28 billion consensus estimate. It was
within the -2% to +2% guidance -- but 1% growth is hardly
inspiring. Engineered systems grew double digits, offset
by declines in legacy systems (Sparc Systems). Operating
margins was the clear miss: At 44%, it was well below the
45.6% consensus estimate. Deferred revenue was a
highlight and grew 5%, year over year, to $8.9 billion.
Cash/marketable securities now total a record $52 billion
($47 billion excluding micros). The company has bought
back 5% of its outstanding shares in the last year.
Earnings guidance for the second quarter was below plan
with softness in hardware worse than expected, software
in line and higher cloud growth. Adding it up, the fiscal
second quarter will now be $0.68-$0.72 vs. the previous
$0.74. Hardware systems revenue will be down 8% to up 2%
and software revenue will grow will to 5%-8%. Cloud SAAS
is expected to be up 39%-44%, and cloud IaaS to be up
40%-44%, which totals revenue growth of up 2%-6% growth
vs. the 4.6% consensus.
This quarter won’t change the bears’ way of thinking.
That likely won’t change until the company can
demonstrate more consistent results and growth in the
cloud that makes a meaningful difference. That said, the
stock is cheap, and the company is a cash flow machine
that can do M&A deals to increase the growth that it
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUS
was long ORCL and MSFT.
We're making a rare exception for Cigna.
This is a solid story, and the stock trades at a discount to the group and the broader market. Also, a word on Walgreen.
We made a few buys this week as the major indices cooled a bit.
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