Oracle (ORCL) released the firm's fiscal first quarter financial results on Monday evening.
For the three month period ended August 31st, Oracle posted an adjusted EPS of $1.19 (GAAP EPS: $0.86) on revenue of $12.453B. While bottom line results (adjusted or not) beat Wall Street-wide expectations, revenue generation fell short of consensus view. Adjustments were made for stock-based compensation expense and for the amortization of intangible assets.
(Unpopular opinion: Stock-based compensation is not a one-time or special expense if your company is several decades old and it has become a regular quarterly thing. It would then be just like any other operating expense.)
Operations
As revenue was growing 8.7%, within the firm revenue generated through Cloud Services and License Support increased 13% to $9.547B, while revenue generated through Cloud License and On-Premise License decreased 10% to $809M. Hardware sales were down 6% to $714M. Services-driven revenue was up 2% to $1.3453B.
Total operating expenses increased 4% to $9.157B leaving GAAP operating income at $3.296B (+26%) on an operating margin of 26.4%, which was up from 20.4% a year ago. Once adjusted, operating income becomes $5.057B and operating margin becomes 40.6%.
After accounting for interest and taxes, GAAP net income lands at $2.42B (+56.3%) or 19% of total revenue. Once adjusted, net income becomes $3.358B (+18.7%) or 22.7% of total revenue.
Slicing and dicing the avenues of revenue generation...
- Cloud Revenue (IaaS + SaaS) of $4.6B, up 30%.
- Cloud Infrastructure (IaaS) of $1.5B, up 66%.
- Cloud Application (SaaS) of $3.1B, up 17%.
- Fusion Cloud ERP (SaaS) of $0.8B, up 21%.
- NetSuite Cloud ERP (SaaS) of $0.7B, up 21%.
Guidance
The firm's outlook was not provided in the press release. You either had to listen to the call or read the transcript. For the current quarter, the firm is expected to grow revenue at 5% to 7% in US dollars including the acquisition of Cerner. The implication there is for revenue of $13B versus the $13.25B that Wall Street had in mind. Excluding Cerner, revenues at what were the core businesses are expected to grow 8% to 10%. This guidance as much as anything else is why the shares traded 10% lower overnight.
Total cloud revenue for the quarter excluding Cerner is expected to grow 29% to 31%. The firm sees adjusted EPS growing 7% to 11% to a range spanning from $1.30 to $1.34. Wall Street had been looking for $1.33, so this pulls the mid-point a penny below "consensus."
Fundamentals
For the quarter reported, Oracle generated operating cash flow of $6.974B. Out of this came CapEx of $1.314B, leaving free cash flow of $5.66B. The firm paid shareholders cash dividends of $1.091B and repurchased $150M worth of common stock for the firm's treasury. The rest went towards the firm's cash position and the repurchase of common stock for the purpose of tax withholding of restricted stock-based awards.
Glancing at the balance sheet, Oracle ended the quarter with a cash position of $12.083B and current assets of $22.166B. Total liabilities add up to $25.357B, which looks bad with an unadjusted current ratio of 0.87. That said, among the current liabilities is $4.499B in short-term debt, which the firm can easily take care of out of cash if unwilling to roll over at a higher interest rate and a whopping $11.12B in deferred revenue, which is not a financial liability. Ex- the deferred revenue, the "adjusted" current ratio rises to a much healthier looking 1.56.
Total assets amount to $136.662B, including $71.28B in goodwill and other intangibles. At 52.2% of total assets, that's a bit much if anyone asks me. So far, nobody has asked. Total liabilities less equity comes to $133.821B. This includes an entry for longer-term debt of $84.442B, which is a lot (again, if someone asked me).
For the current (short-term) situation, this balance sheet is fine. Going out further, that debt-load may become a beast if upon maturity, the firm is not sporting a beefy cash position and interest rates remain elevated. Fortunately, Oracle is a free cash flow beast, so this is a problem that the firm can work on as long as they don't get carried away returning capital to shareholders.
Wall Street
Since these earnings were released last night, I have come across 12 sell-side analysts rated at four stars or better at TipRanks who have also opined on ORCL. After allowing for changes, across these 12, there are eight "hold" or hold-equivalent ratings and four "buy" or buy-equivalent ratings. One of the "holds" did not set a target price, so we are working with 11 target prices.
The average target price across these 11 analysts is $131.36 (John Difucci of Guggenheim) with a high of $150 and a low of $105 (Gil Luria of DA Davidson). Once omitting those two as possible outliers, the average target across the other nine raised to $132.22. The average buy-rated target is $141.75, while the average hold-rated target stands at $125.43.
My Thoughts
The quarter was mixed. Sales were weaker than expected, as was revenue guidance. That said, margins are rising.
Larry Ellison, who is both Chairman and Chief Technology Officer, answered a lot of questions regarding generative AI late in the call. He sounded quite confident in Oracle's ability to compete in the space. This was after he was quoted in the press release saying... "As of today, AI development companies have signed contracts to purchase more than $4B of capacity in Oracle's Gen2 Cloud."
Since the market opened, the stock was down more than 13%. These results and that commentary do not sound as bad as this market reaction is. The stock started the day trading at 22 times forward looking earnings. It's less than that by now. Less than 1% of the float is short, so there will be no artificial rescue coming from that crowd.
That sound you hear is portfolio managers and swing traders trying to get out of the stock as the shares opened below both the 21 day EMA (exponential moving average) and the 50 day SMA (simple moving average). Relative strength looks like it jumped off of a cliff. The daily MACD (moving average convergence divergence) is now set up poorly.
Is there a place to get in? Yes, there certainly is. Oracle is not going out of business. An interested investor could start to enter around this morning's prices and look for support in the 61.8% Fibonacci retracement of the October 2022 through June 2023 rally/200 day SMA area. In plain English, that would be between $102 and $98.
Trade Idea (And I am going to follow through with this once this article is public.)
- Purchase a 1/8 portion of full position size at $109/$110-ish.
- Sell $100 October 20th puts potentially representing another stake of 1/8th for a rough $0.355.
- Sell $95 October 20th puts potentially representing another stake of 1/8th for a rough $0.75.
Note:
Net basis will be about $1.10 below entry price. Should these puts never be exercised, that would be that. Should these puts be exercised, this investor has been paid to wait for his or her price.
A nervous investor could then purchase maybe enough October 20th $90 puts to represent a 1/4 of the intended stake for about $0.15 to defend against the possibility of a face ripping sell-off.
