Oracle (ORCL) posted strong fiscal first-quarter results Tuesday that showed significant growth in new software licenses and product support (about two thirds of revenue) and some weakness in hardware systems products revenues (about 20% of its top line). Services revenue, accounting for the balance, increased nicely and remained steady at about 14% of sales. We are maintaining our $38 fair value estimate and make available our 16-page report here.
Oracle’s top-line advanced at a low double-digit pace, while the firm’s GAAP operating income increased an impressive 40%, translating to a 36% increase in net income and a 46% jump in operating cash flow. The significant profitability expansion was driven by a refocus on its high-end server business – Exadata, Exalogic, and SPARC M-Series – while it shed lower margin commodity hardware revenue, driving roughly a 6 percentage point increase in hardware gross margins. We’re encouraged by Oracle’s new line-up of products, particularly the SPARC T4 microprocessor (which will replace the T3 microprocessor) and the SPARC SuperCluster, a new high-end server. Oracle claims the T4 is five times faster than the T3, and we think customers will be generally pleased by this performance improvement. Cash flow was bolstered by the jump in net income, a decline in trade receivables, and an increase in deferred revenues — offset in part by a reduction in accounts payable. With operating cash flow ($5.4 billion) at nearly 3 times net income (about $1.8 billion), we’re fans of Oracle’s earnings quality during the period.
Overall, we were pleased with the firm’s fiscal first-quarter, which also provides some insight into the health of the tech sector through July and August. Oracle noted “broad-based geographic and product momentum,” and interestingly, noted that Applications revenue was particularly strong in Europe (up 60%), contradicting much of the media reports regarding the supposed corporate crisis there. The company indicated that it expects new software license revenue to expand from 6% to 16%% (a large range) in its fiscal second-quarter, while hardware product revenue should continue to fall by, at most, a 5% pace.
We like the outlook for software licenses and are less concerned about the declines in hardware, given management’s focus on moving away from low-margin commodity servers. We also think the firm’s second-quarter GAAP revenue-growth guidance for 5% to 9% growth and its earnings-per-share range of $0.56 to $0.58 are achievable. We are strongly considering adding Oracle to our Best Ideas list.