Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: Shares of Dividend Growth Newsletter portfolio holding Oracle Corporation are on an upward trajectory after the tech giant reported that its strategic transition towards cloud-based offerings was going well during its latest earnings report.

By Callum Turcan

On September 10, Oracle Corporation (ORCL) reported first quarter fiscal 2021 earnings (period ended August 31, 2020) and we liked what we saw. In constant currency terms, the company’s ‘cloud services and license support’ and ‘cloud license and on-premise license’ segments reported year-over-year sales growth of 2% and 8%, respectively. We appreciate that Oracle’s cloud-oriented businesses are finally starting to gain some real traction in this lucrative and hypercompetitive market. Additionally, Oracle’s strong performance occurred in the face of the ongoing coronavirus (‘COVID-19’) pandemic, highlighting the resilience of its business model and the company’s ability to rise to the occasion.

We increased the weighting of Oracle in our Dividend Growth Newsletter portfolio back on August 20 (link here), and as of this writing, shares of ORCL yield ~1.6%. Our fair value estimate for ORCL sits at $65 per share, well above where shares are trading at as of this writing. In our view, Oracle offers investors a nice combination of capital appreciation and dividend growth upside. We give Oracle a Dividend Cushion ratio of 3.2, earning Oracle an “EXCELLENT” Dividend Safety rating. Please note that these metrics factor in our expectations that Oracle will steadily grow its per share dividend over the coming fiscal years.

Quarterly Update

Back in June, we wrote a note (link here) that covered our thoughts on Oracle after the firm reported fourth quarter fiscal 2020 earnings (period ended May 31, 2020) which among other things highlighted its recent cloud computing wins, including Oracle’s deal with Zoom Video Communications Inc (ZM). In Oracle’s latest earnings report the firm noted that its “infrastructure businesses are also growing rapidly as revenue from Zoom more than doubled from Q4 last year to Q1 in this year” and furthermore, that Oracle has “a high level of confidence that our revenue will accelerate as we move on past COVID-19.”

The company’s deal with Zoom highlighted the ability for Oracle’s cloud offerings to scale to the occasion at a moment’s notice. Larry Ellison, co-founder, executive chairman and Chief Technology Officer of Oracle, praised Oracle’s deal with Zoom several times during Oracle’s latest earnings call, noting that:

“Zoom is a perfect example of why customers are choosing Oracle Cloud Infrastructure [‘OCI’]. We see the benefits of choosing OCI and Zoom’s results. Zoom’s recent earnings were stunning. Zoom may be the fastest company ever to have their company named become a verb.”

Furthermore, Oracle’s CEO Safra Catz noted the firm’s ‘Fusion ERP’ and ‘NetSuite ERP’ offerings performed well last fiscal quarter. Please note ERP stands for enterprise resource planning, management software that allows for integrated applications to manage core business processes. Oracle’s CEO noted that the firm’s “Fusion retention rates, which are already high continue to go up” during Oracle’s latest earnings call.

Pivoting now to Oracle’s “autonomous database consumption revenue,” sales here were up 64% year-over-year according to Oracle’s CEO. In a different article published back in June (link here), we noted that Oracle had recently launched its ‘Autonomous Database’ offering which is an Infrastructure-as-a-Service (‘IaaS’) that attempts to reduce labor costs and minimize the potential for human error for its customers. We appreciate that Oracle’s new database offering maintained its momentum last fiscal quarter, keeping pandemic-related headwinds in mind.

Financial Update

Company-wide, Oracle reported 2% year-over-year GAAP sales growth and 12% year-over-year GAAP operating income growth last fiscal quarter. Share repurchases reduced Oracle’s weighted average diluted share count by 9% year-over-year in the fiscal first quarter which helped boost Oracle’s GAAP diluted EPS to $0.72, good for a 14% year-over-year increase.

It is worth noting that Oracle incurred $0.2 billion in restructuring charges last fiscal quarter, from up $0.1 billion in the same fiscal quarter last year. The firm’s cost control measures elsewhere, such as the year-over-year reduction in its ‘sales & marketing’ expenses, helped boost Oracle’s GAAP operating margin by over 305 basis points year-over-year in the fiscal first quarter. We strongly appreciate Oracle’s cost containment efforts, which have proved effective so far. Economies of scale were also at play here.

As of August 31, Oracle had $42.3 billion in cash, cash equivalents, and marketable securities on hand versus $3.0 billion in short-term debt and $67.8 billion in long-term debt. The firm generated $5.5 billion in free cash flow and spent $4.9 billion on share repurchases through its buyback program (not including $0.5 billion in share buybacks relating to “tax withholdings upon vesting of restricted stock-based awards”) and $0.7 billion on its dividend obligations during the fiscal first quarter. We would like Oracle to pare down its net debt load over time, though we appreciate its high quality cash flow profile and ample liquidity levels.

Oracle generated ~$5.95 billion in net operating cash flow and spent ~$0.45 billion on its capital expenditures last fiscal quarter (to arrive at the aforementioned $5.5 billion in free cash flows). Its low capital expenditure requirements and ample net operating cash flows highlight why we view Oracle’s financial position favorably.

TikTok Update

We wrote a piece back in late-August (link here) that noted a consortium led by Oracle had submitted a bid to acquire the US operations and potentially other operations of TikTok, owned by Beijing-based ByteDance. During Oracle’s latest quarterly conference call, the firm’s CEO noted “that we will be making no comments regarding the press reports about TikTok, so there's no need to ask.” We continue to follow this story closely. TikTok is reportedly attempting to avoid the need for an outright sale, possibly by transferring operational control to a US company and retaining a stake in the spinoff.

Concluding Thoughts

Shares of Oracle popped higher after its latest earnings report as investors clearly liked what the tech giant had to say about its ongoing transformation towards cloud-based offerings and away from its legacy IT business. We continue to like Oracle as a holding in our Dividend Growth Newsletter portfolio.

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Computer Hardware Industry – AAPL BB HPQ IBM TDC

Software Industry – ADBE ADSK EBIX INTU MSFT ORCL CRM

Internet Content & Services Industry – GOOG GOOGL BIDU FB JD TECHY TWTR

Internet Content and Catalog Retail Industry – BABA AMZN BKNG EBAY EXPE GRPN IAC OSTK QRTEA STMP

Related: SPY, QQQ, ZM

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Callum Turcan does not own shares in any of the securities mentioned above. Apple Inc (AAPL), Microsoft Corporation (MSFT), and Oracle Corporation (ORCL) are all included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares, Apple Inc, Facebook Inc (FB), and Microsoft Corporation are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.