After reporting fourth quarter and full year results for fiscal 2015 on June 17, Oracle (ORCL) shares took a significant hit. It is easy to see the effect foreign exchange rates had on the quarterly results, but there is more to the miss than meets the eye.
In the fourth quarter of fiscal 2015, Oracle reported revenue of ~$10.7 billion, a decrease of 5% as reported, or an increase of 3% on a constant currency basis. Driving the top line lower was a decrease in software and cloud revenue, more specifically new software licenses, where sales dropped 17%; new software licenses make up more than 20% of total revenue. Attempting to offset this significant drop was strong 29% growth in the firm’s cloud services business, but this segment currently makes up a measly 3%-5% of total revenue. Though Oracle hit the low end of its revenue expectations for the quarter, Oracle’s reported non-GAAP earnings per share was $0.78, compared to guidance in the range of $0.90-$0.96. The company’s robust cloud services revenue growth is simply too insignificant to compensate for weak software license performance, and subpar earnings are sounding an alarm bell.
Management would have you believe differently, however. The vast majority of Oracle’s quarterly conference call consisted of the C-suite talking about how well the company is positioned to capture the demand of the shift to cloud computing. Though this is true, they failed to sufficiently address, in our view, the near-term sales and earnings pressure from the company’s remaining businesses. The light earnings guidance management provided for the current fiscal first quarter of 2016 isn’t helping management’s case either. The Street walked away concerned from the report for one obvious reason: management is saying one thing, but its financials and outlook reveal another.
Its efforts in the cloud are still notable though. Oracle’s $426 million in cloud services new business bookings during its fiscal fourth quarter is the most for any cloud services company in any quarter ever. The company’s cloud services revenue is even growing faster than that of its smaller, more-focused competitors, such as Salesforce.com (CRM) and Workday (WDAY). Salesforce.com is projecting growth in the range of 21%-22% for its current fiscal year, currently in the second quarter, whereas Oracle is expecting growth of its cloud services revenue to push rates near 60% on a constant currency basis for its fiscal 2016. Using its competitors’ methodology, Oracle claims its cloud services new business bookings are growing at ~70%, much faster than Salesforce.com and Workday. The executive suite also indicated that its future revenue stream realized from cloud services bookings can potentially be several times higher than that of its software licensing over a similar ten year agreement period.
We are pleased with ongoing performance in its cloud initiatives, but we don’t think the revenue stream should have captured as much attention as it did both in the press release and on the call, especially in light of reported performance. Oracle spent a large portion of its prepared remarks on the quarterly call talking about deferred revenue performance, perhaps in an effort to point investors away from weak overall revenue performance. But not only was deferred revenue roughly flat on a year-over-year basis at the end of fiscal 2015, but the new business bookings for its cloud services were clearly insufficient to offset the reduction in new software licenses revenue expected in the near term. Deferred revenue should have expanded significantly more than what was revealed on the books this past quarter, irrespective of how management tries to explain it away.
If most investors hadn’t already written off the quarter as a disappointment, management’s non-GAAP guidance for the first quarter of fiscal 2016 left much to be desired. Oracle continues to expect its cloud services business to grow at a terrific rate and for total revenue to grow at a 5%-8% annual pace on a constant currency basis in the current quarter, but foreign-exchange headwinds will surely make reported numbers significantly less impressive.
Not only did management say that non-GAAP earnings in the current period are expected in the range of $0.56-$0.59 per share, lower than the $0.60+ per share consensus numbers, but the company said it would discontinue providing GAAP guidance, a huge red flag in our opinion. Such a move suggests to us that management is doing the best it can to mask ongoing poor performance. Oracle’s customers are certainly shifting to the cloud, offering fantastic opportunities, but the company’s reported results aren’t showing it, and weaker-than-expected earnings are increasing shareholder skepticism.
Though the near-term will be bumpy, Oracle is not going away anytime soon, and its balance sheet, flush with $54 billion in cash and marketable securities ($12.4 billion net cash), will help it through the cloud transition. The firm is undoubtedly a great company, but investors get to choose from all of technology for ideas. We continue to prefer other large cap tech ideas, namely Apple (AAPL), Microsoft (MSFT), and Cisco (CSCO), all three of which offer a higher dividend yield than Oracle at the moment.