Enterprise tech giant Oracle (click ticker for report: ) posted modest results for its fiscal year 2014 first quarter Wednesday that were mostly in-line with the company’s prior guidance. Revenue increased 2% year-over-year to $8.4 billion, a touch below consensus estimates. Earnings-per-share on a non-GAAP basis was 12% higher than the year-ago period at $0.59. Free cash flow for the quarter was phenomenal at $6.1 billion, equal to 73% of revenue. CEO Larry Ellison was notably absent from the conference call as he sails in the America’s Cup.
Software Drives Revenue Expansion
Hardware revenue was weak, with product sales falling 14% year-over-year to $669 million (hardware systems support revenue, however, advanced a modest 3% year-over-year to $592 million). President Mark Hurd downplayed the weak results, saying Oracle was more focused on “high Oracle content” products, implying that poor hardware results don’t appropriately reflect the business.
Software, on the other hand, was reasonably strong, growing 6% year-over-year (8% excluding currency) to $6.1 billion. The strength was driven by solid performance from software license updates and support (up 7% year-over-year) and new software licenses and cloud subscriptions (up 5% year-over-year). Even if hardware struggles, the free cash flow generated from software far exceeds that of hardware.
Margins Were Fantastic
President and CFO Safra Ada Catz summarized how Oracle feels about margins succinctly, saying:
“Our non-GAAP operating income was $3.7 billion, which was 6% higher than last year, and operating margin expanded to 45%. We still believe there remains ample leverage in the business model.”
As Catz said, non-GAAP operating margins were 45% during the period, simply a fantastic number for any company, especially one with as much revenue as Oracle.
Guidance
Looking ahead, Oracle offered fairly broad guidance for its second quarter of fiscal year 2014, calling for new software license and cloud subscription revenue growth to be in the range of -4% (negative 4%) to +6% year-over-year, hardware product revenue expansion to be -9% (negative 9%) to +1% year-over-year, driving total revenue growth of 1%-4% in constant currencies and -1% to +2% in reported dollars. Reported non-GAAP earnings per share are expected to be between $0.64 and $0.69 during the period. Both figures fall below consensus estimates, but we don’t think the outlook is too bad.
Valuentum’s Take
Though revenue growth at Oracle remains subdued, free cash flow generation does not. Shares currently trade at the low-end of our fair value range, but we prefer Microsoft (click ticker for report: ) due to its strong enterprise presence and huge return of capital to shareholders. Microsoft is held in our Dividend Growth Newsletter portfolio.