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Oracle’s fiscal 2019 second quarter report revealed expectations for accelerating top-line growth thanks in large part to strong momentum in bookings. The company’s technology leadership may be greater than ever before, and it continues to generate robust free cash flow. Management’s appetite for buybacks appears insatiable.
By Kris Rosemann
Simulated Dividend Growth Newsletter portfolio idea Oracle (ORCL) released its fiscal 2019 second quarter report December 18, and management brought with it an increase in its internal expectations for top- and bottom-line growth for the full fiscal year. On the quarterly conference call, CEO Safra Catz stated expectations for an acceleration of constant currency revenue growth in the second half of the fiscal year, and the company’s double-digit constant currency earnings per share growth guidance for the full year has been raised, though an explicit guidance range was not released.
Oracle reported total revenue growth of 2% on a year-over-year basis in constant currency thanks in part to could service and license support revenue being up 5%, but the larger story comes from the company’s large and growing opportunity in Enterprise Resource Planning (ERP) and Human Capital Management (HCM). Its software-as-a-system (SaaS) bookings growth in these areas has accelerated in recent quarters and hit the high-30s percent range in its fiscal second quarter, thanks in part to notable strength in non-renewal bookings driving net bookings to the highest in company history outside of its fiscal fourth quarters.
Management claims to have the most advanced ERP technology and market leadership in cloud ERP with plenty of growth ahead of it, and it points to its new Autonomous Database as the largest technology lead it has ever had over its database competition. The company holds 50% share of the database market, and its technology leadership, via the ongoing pairing of its Autonomous Database with its next generation cloud infrastructure, should ensure this market share remains intact and grows.
While bookings marched higher and revenue growth was muted, Oracle’s margins were roughly flat in its fiscal second quarter. Gross margin for cloud services and license support was roughly 86% as ongoing improvement in SaaS gross margins, stability in software support, and continued investments in cloud infrastructure combined to keep the measure in line with the year-ago period, and non-GAAP operating income and margin were also roughly flat. Gross margins should improve as the company’s cloud business continues to scale.
Oracle’s fiscal second quarter marked its seventh consecutive quarter of double digit earnings per share growth, which came in at 19% in constant currency from the year-ago period as the non-GAAP figure for the period was $0.80. Through the first six months of fiscal 2019, Oracle’s operating cash flow dropped ~2% on a year-over-year basis, but lower capital spending helped push free cash flow ~2% higher to nearly $6.5 billion. Cash dividends paid in the period came in at less than $1.5 billion, showcasing impressive coverage of dividends with free cash flow.
However, the company spent more than $19.9 billion in share repurchases in the first half of its fiscal 2019, and though these transactions were completed at price levels below our fair value estimate, given its share price was at a discount to our fair value estimate of $58 throughout the entire first half, the massive cash outflow caused the company’s balance sheet to flip to a net debt position. It does hold cash and cash equivalents and marketable securities of $49.4 billion as of the end of its fiscal second quarter, but it also has a total debt position of $58 billion. This compares to a net cash position of $6.6 billion at the end of fiscal 2018.
While we do not take issue with management buying back shares that it perceives to be undervalued, the sheer magnitude of its buybacks thus far in fiscal 2019 has been astounding. As of the end of the first quarter of fiscal 2019, the company reported $19.8 billion remaining under its authorized share repurchase program, and after buying back nearly $10 billion in its fiscal second quarter, it now has more than $9.8 billion authorized for buybacks remaining. We tend to be of the opinion a more balanced capital allocation plan may prove to be a more prudent strategy, even as we agree with management that shares appear attractive.
Beyond the potential for capital appreciation, Oracle’s dividend growth prospects are attractive as its Dividend Cushion ratio is currently an impressive 4.4, but we’re keeping a close eye on its balance sheet health. Its yield leaves a bit to be desired as it currently sits at just over 1.6%. We’re looking for strong dividend growth moving forward, but that may be contingent upon management’s willingness to commit to higher quarterly dividend payments in place of its significant run up in share repurchases in recent quarters.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.