Image Source: Oracle Corporation – November 2019 IR Presentation
By Callum Turcan
Shares of Oracle Corporation (ORCL) surged in the wake of the tech giant reporting its second-quarter fiscal 2022 earnings (period ended November 30, 2021) on December 9, which beat both consensus top- and bottom-line estimates. We include Oracle as an idea in both the Dividend Growth Newsletter and ESG Newsletter portfolios (more on that here), and we couldn’t be more pleased with the company’s performance of late. Its pivot towards cloud-oriented offerings is playing out quite favorably as Oracle’s growth outlook is now quite bright.
Earnings Update and Outlook
Oracle’s GAAP revenues were up 6% year-over-year last fiscal quarter, hitting $10.4 billion. This was made possible via strong growth at its ‘cloud services and license support’ (up 6%), ‘cloud license and on-premise license’ (up 13%), and ‘services’ (up 7%) offerings, which offset a moderate decline at its ‘hardware’ sales. Its cloud-based enterprise resource planning (‘ERP’) offerings continue to perform exceptionally well as its Fusion ERP business posted 35% year-over-year revenue growth, while revenue at its NetSuite ERP business was up 29% year-over-year in the fiscal second quarter.
During Oracle’s latest earnings call, management had this to say in regards to the firm’s cloud growth trajectory and near-term guidance (emphasis added, moderately edited):
“So total cloud services and license support revenues for the quarter were $7.6 billion, up 6% in constant currency and accounted for 73% of total company revenue. Total cloud revenues, when annualized, are now $10.7 billion and grew 22%, with cloud bookings growing faster than our cloud revenue growth rate. And as a result, we expect cloud revenue will accelerate further and exit the fiscal year in the mid-20s, potentially higher. GAAP application subscription revenues were $3.1 billion, up 8% organically in constant currency and our highest growth rate in four years…
Let me now turn to my guidance for Q3, which I’ll provide on a non-GAAP basis. The U.S. dollar strengthened dramatically in November… And assuming currency exchange rates remain the same as they are now, which we have no idea if they will or not, I expect we will see a currency headwind of 3% for revenue and $0.05 for EPS in Q3. Total revenue for Q3 is expected to grow between 6% to 8% in constant currency and grow between 3% to 5% in USD [terms].
Clearly, the midpoint of the range is 7%, and that is higher than the 6% we just reported in Q2 and higher than the 2% we reported in Q1. So everything is trending in the right direction. Cloud service and license support revenue for Q3 is expected to grow between 6% to 8% in constant currency and grow between 3% to 5% in USD [terms]. Non-GAAP EPS for Q3 is expected to grow between 2% and 6% in constant currency and be between $1.19 and $1.23 in constant currency [terms].” — Safra Catz, CEO of Oracle and member of the firm’s board
Litigation charges that date back to a dispute between Oracle and HP before HP split into two firms, HP Inc (HPQ) and Hewlett Packard Enterprise Company (HPE), saw Oracle’s GAAP net income swing negative last fiscal quarter. On a non-GAAP basis, its adjusted EPS grew by 14% year-over-year last fiscal quarter, hitting $1.21. Excluding the litigation charges, which date back to a legal saga that began roughly a decade ago, Oracle remained an incredibly profitable enterprise in the fiscal second quarter.
In conjunction with its latest earnings update, Oracle announced it had increased its share-repurchase authorization by ~$10 billion. According to the firm, its operating cash flow on a trailing-twelve month basis stood at $10.3 billion, and it exited the second quarter of fiscal 2022 with $7.9 billion in short-term deferred revenue. The highly visible nature of its near term cash flows, a product of its sizable recurring revenue stream, enables Oracle to reward shareholders in a sustainable manner.
We caution that Oracle exited November 2021 with a net debt load of $55.6 billion (inclusive of short-term debt). However, the firm’s $22.8 billion in cash, cash equivalents, and current marketable securities on hand at the end of this period, providing Oracle with ample liquidity to meet its near term financing needs. In our view, we would like to see Oracle pare down its net debt load over time, though that does not appear likely for the foreseeable future.
Operational Update
Oracle is optimistic that recent improvement in its cloud-based ERP businesses will continue over the coming years, ultimately resulting in an enormous and incredibly lucrative operation. Improving the business-to-business (‘B2B’) capabilities of its ERP offerings represents a key growth opportunity according to Larry Ellison (co-founder, Chairman, and CTO of Oracle). Mr. Ellison noted during Oracle’s latest earnings call that “we are not on our way to building a $20 billion cloud ERP business in five years. I think it’s going to be a lot bigger than that” and went on further to state (emphasis added):
“We are working in concert with our banking and logistics partners to originate purchase financing, products shipped, delivery tracking, invoicing and payments right inside the two transacting Oracle Cloud ERP procurement systems. Oracle Cloud ERP will soon bring an entirely new level of automation to B2B commerce, one that very much resembles the ease of doing business and efficiency of B2C [business-to-consumer] e-commerce. This new ERP automation system, all these new capabilities will dramatically simplify our customers’ procurement and supply chain processes. And as such, it represents a huge new opportunity for Oracle to grow its cloud ERP ecosystems.” — Co-founder, Chairman, and CTO of Oracle
Oracle’s pivot to providing cloud-oriented offerings and away from its legacy IT services and hardware has been steadily unfolding over the past decade, though more recently, the company’s growth trajectory has started to really pick up steam. As Oracle’s CEO (Safra Catz) noted, this part of the firm’s business is set to exit the current fiscal year with revenue growth in the “mid-20s” percent, which is an incredibly big deal. Oracle is proving that it can become a serious player in the space, and investors are starting to take notice. We are intrigued by the planned improvements at Oracle’s cloud-based ERP businesses, with an eye towards enhanced B2B offerings.
Concluding Thoughts
We are huge fans of Oracle and its stellar cash flow generating abilities. The top end of our fair value estimate range sits at $101 per share, though we may tweak our cash flow valuation model to reflect stronger revenue growth and earnings leverage in light of Oracle’s promising earnings update and improving growth outlook. We like Oracle as an idea in both the Dividend Growth Newsletter and ESG Newsletter portfolios.
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Callum Turcan does not own shares in any of the securities mentioned above. Apple Inc (AAPL), Cisco Systems Inc (CSCO) and Microsoft Corporation (MSFT) are all included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares, Meta Platforms Inc (FB), Korn Ferry (KFY), PayPal Holdings Inc (PYPL) and Visa Inc (V) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Oracle Corporation (ORCL) and Qualcomm Inc (QCOM) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Meta Platforms, Oracle Corporation, and Taiwan Semiconductor Manufacturing Company Limited (TSM) are all included in Valuentum’s simulated ESG 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.