- Oracle reported much higher revenue from its cloud software and raised guidance for revenue growth from the cloud platform.
- Cloud will improve Oracle's growth prospects over the long-run, actual growth rate of about 50% will eventually change software use.
- The average target price of top analysts is at $43.94, which appears reasonable, in my opinion.
Oracle Corporation. (NYSE:ORCL) reported its fiscal fourth-quarter financial results on June 16, after market close. Although the company missed earnings-per-share expectations marginally, the market reaction was positive due to much higher revenue and guidance raise of its cloud software, and Oracle shares gained almost two percent in after-hours trading.
Oracle's adjusted earnings-per-share of $0.81, missed expectations by $0.01. Revenue declined to $10.59 billion from $10.71 billion in the same quarter a year ago, ahead of the consensus of $10.46 billion. The company has shown earnings-per-share surprise in four of its last eight quarters, missing estimates in three quarters, as shown in the table below.
Source: Yahoo Finance
In the report, Safra Catz, Oracle co-CEO, said:
Fourth quarter SaaS and PaaS revenue growth accelerated to 68% in constant currency, significantly higher than my guidance. SaaS and PaaS gross margins continued to improve throughout the year, exiting FY16 at 56%. Bookings in Q4 were also very strong enabling us to raise our guidance for Q1 SaaS and PaaS revenue growth, which we now expect to be between 75% and 80%.
Moreover, Oracle has been adding many more cloud customers. Oracle co-CEO, Mark Hurd said in the report:
We added more than 1,600 new SaaS customers and more than 2,000 new PaaS customers in Q4. In Fusion ERP alone, we added more than 800 new cloud customers. Today, Oracle has nearly 2,600 Fusion ERP customers in the Oracle Public Cloud -- that's ten-times more cloud ERP customers than Workday.
Despite the enthusiasm of the company about cloud revenues growth, to tell the truth, it has come at the cost of on-premise software revenues. In the table below, I have calculated the growth of cloud revenues and the growth of on-premise software revenue for the last four quarters. While cloud growth is very impressive, 49.1% YoY in the most recent quarter, in real money cloud revenue i ncreased $283 million year-over-year, and the on-premise software revenue decreased $244 million. In the previous quarters, the rates were even worse when the gains in cloud revenue were much lower than the decline in on-premise software revenue. However, I agree with the company that the move to the cloud will improve its growth prospects over the long-run, as the actual growth rate of about 50% will eventually change the picture for cloud software.
Since the beginning of the year, Oracle stock price is up 8.6% while the S&P 500 Index has increased 1.3%, and the Nasdaq Composite Index has lost 4.1%. However, since the beginning of 2012, Oracle stock has gained only 54.7%. In this period, the S&P 500 Index has increased 64.7%, and the Nasdaq Composite Index has risen 84.3%. According to TipRanks, the average target price of top analysts is at $43.94, an upside of 10.7% from its June 17 close price, which appears reasonable, in my opinion.
Oracle's valuation metrics are pretty good. The trailing P/E is at 19.17, and the forward P/E is low at 13.14. The quick ratio is very attractive at 3.70, and the price to free cash flow is at 16.31. Furthermore, the Enterprise Value/EBITDA ratio is also low at 9.78.
In addition, Oracle's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.
Oracle has a strong balance sheet, and it is generating huge free cash flows. The company had $56.1 billion in cash and equivalents at the of the last quarter compared to $40.1 billion in total debt.
Oracle started to pay a dividend in April 2009. The forward annual dividend yield is at 1.51%, and the payout ratio is only 21.3%. The annual rate of dividend growth over the past three years was very high at 28.6%, and over the past five years was also high at 20.6%.
According to the company, it remains committed to returning value to its shareholders through technical innovation, strategic acquisitions, stock repurchases, prudent use of debt and a dividend. Regarding acquisitions, Oracle continues to focus on finding the right companies at the right valuations, that make both strategic and financial sense.
Oracle reported much higher revenue from its cloud software and raised guidance for revenue from the cloud platform. Although cloud revenue growth has come at the cost of on-premise software revenue, I agree with the company that the move to the cloud will improve its growth prospects over the long-run, as the actual growth rate of about 50% will eventually change the picture for cloud software. Oracle's valuation is good; the forward P/E is low at 13.14, and the Enterprise Value/EBITDA ratio is also low at 9.78. Moreover, the company has a strong balance sheet, it generates strong free cash flow, and returns substantial capital to its shareholders by stock buybacks and increasing dividend payments. The average target price of top analysts is at $43.94, an upside of 10.7% from its June 17 close price, which appears reasonable, in my opinion.