Oracle (ORCL) posted disappointing fiscal second-quarter results that sent the shares tumbling today. The news follows Red Hat’s (RHT) lower-than-expected outlook earlier this week and casts a shadow over the strength of the software space during the calendar fourth quarter and into next year. Though we will be revisiting our $38 per share fair value estimate for Oracle based on management’s poor outlook, we don’t expect a material change it.
Oracle’s revenue jumped 2% as growth in software license sales and software license updates/product support revenues offset nearly a 14% decline in hardware systems products revenues, the latter caused by a transition to T4 processor-based products. The company noted that new software license revenue was impacted by “additional approvals required for previously-scheduled and expected deals” in the quarter, which caused the completion of a number of orders to be pushed forward. Management believes that it has put in place better deal management to prevent such setbacks in the future, but we cannot rule out that aggregrate tech spending is beginning to slow. Support attach rates and software renewal rates continue at usual high levels, according to management, and we were pleased with this statement.
Oracle continues to be optimistic about its new products like Fusion Cloud ERP and Cloud CRM, and noted that sales of its engineered systems accelerated in the fiscal second quarter. Oracle’s Exadata doubled from last year, while Exalogic more than doubled on a sequential basis. And the company shipped its first SPARC SuperCluster in the second quarter and expects deliveries of its Exalytics systems and the Oracle Big Data Appliance in the third quarter.
Non-GAAP operating income increased 3% in the second quarter, while its non-GAAP operating margin came in at 45%, a level management believes it could improve in coming periods. Non-GAAP net income advanced 6%, while non-GAAP earnings-per-share increased reached $0.54 per share (versus consensus estimates of $0.57). However, operating cash flow continues to be impressive, growing 45%, to $13.1 billion during the trailing twelve month period.
Looking ahead to the fiscal third quarter, management expects new software license revenue growth to range from 2% to 12% and hardware product revenue to fall from 4% to 14%, leading to total revenue growth on a non-GAAP basis in the range of 3% to 7%. Non-GAAP earnings-per-share is expected in the range of $0.55 to $0.58 compared with $0.54 in last year’s quarter and consensus estimates of $0.59 per share. Oracle’s board of directors authorized the repurchase of up to an additional $5 billion of stock, which should help hold the line with earnings per share and provide some technical buying support for the stock.
All things considered, Oracle remains undervalued, but we continue to believe Microsoft (MSFT) is the best play in the software space at this time and are strongly considering adding it to our Best Ideas Newsletter, should broad-based weakness in the software space continue into the coming weeks.