Oracle's Earnings: The Long and Short View

After two days of gains that have taken U.S. stocks right back to within sneezing distance of their all-time highs, one might expect the market to remain in a holding pattern until the outcome of the Fed's monetary policy meeting. The Federal Open Market Committee (FOMC) will release its statement at 2 p.m. EDT, followed by Janet Yellen's first press conference as Fed chairwoman. The benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) were up 0.01% and 0.09%, respectively, as of 10:20 a.m. EDT. Oracle (NYSE: ORCL  ) will be on investors' radar this morning after releasing disappointing fiscal second-quarter results yesterday afternoon -- shares are down 3% this morning.

The enterprise software giant missed Wall Street's expectations for adjusted earnings per share, revenue, and EBITDA (earnings before interest, taxes, depreciation, and amortization -- a crude measure of cash flow). On EPS, this constitutes Oracle's third miss in the past five quarters; on revenue, it's four misses in five quarters; and on EBITDA, it's five misses in five quarters. But look at the magnitude of the latest misses: its largest, for EPS, was less than 3%; on revenue, the miss was less than half a percentage point.

There were more positive aspects to the results, too. Notably, revenue from hardware systems products rose 8% to $725 million -- the first such increase since Oracle acquired Sun Microsystems in 2010 (although it's not clear that this is enough to justify the $5.6 billion purchase price). The growth in hardware revenue relates to the 30% growth (on a constant currency basis) in the engineered server systems business, which was one of the highlights of the quarter. As Oracle CEO Larry Ellison said in a statement:

Our Engineered Systems business is growing rapidly for the same fundamental reason that our Cloud Applications business is growing rapidly. In both cases, customers want us to integrate the hardware and software and make it work together, so they don't have to.

Cloud software subscription revenue grew 25% in the quarter, with quarterly cloud application revenue now approaching $300 million. Large enterprise software vendors, including IBM and Microsoft, are now offering their products in the cloud -- software running on hosted hardware -- as corporate IT buyers shift toward this lower-maintenance format.

Oracle suffers from the curse of size, both in terms of its ability to be nimble and to grow its revenue base. Nevertheless, I continue to think the company is well positioned to serve its corporate customers. No one is reasonably expecting Oracle to generate massive growth at this stage, but at less than 12.5 times next 12 months' earnings-per-share estimate, one can expect the shares to produce reasonable returns going forward, with good odds of outperforming the broad market.

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