Oracle Disappoints, But It's Still a Good Value

When a technology company misses analyst estimates and disappoints based on its own guidance, the stock usually gets punished severely. However, in the case of Oracle (NYSE: ORCL  ) the market was much more forgiving, with the stock down barely a percentage point on the day. Investors' reaction to the news is telling you a lot of what you need to know about the stock: Oracle remains one of the most attractive investing ideas in technology.

Oracle disappoints, again
First things first, aside from its hardware product sales, it wasn't a great set of results:

  • New software license and cloud subscriptions came in with 6% growth vs. internal guidance of 2%-12%.
  • Hardware product revenue growth came in with 10% vs. internal guidance that ranged from negative 1% to positive 9% growth.
  • Total revenue came in at 6% growth vs. internal guidance of 3%-7%.
  • Non-GAAP EPS came in at $0.68, at the bottom of internal guidance of $0.68-$0.72.

In addition, Oracle had predicted a non-GAAP tax rate of 24% for the quarter, but the actual rate came in at 23.1%. In other words, Oracle would have missed the lower end of its own EPS guidance had the tax rate been as expected. Total hardware systems revenue made up 14.4% of total revenue in the first nine months of its fiscal year, which means that out-performance from hardware is unlikely to offset under-performance in software.

3 positive takeaways from Oracle's results
While it's never a good thing to see a company disappoint with earnings, there were some key positive points in the results. Oracle is the incumbent champion of the on-license, on-premise software model. Its challenge is to migrate its revenue streams toward the cloud while it fends off competition from pure cloud plays like Workday (NYSE: WDAY  ) in human-capital management, or HCM, and Salesforce.com in customer relations management.

Fools need to bear the following points in mind concerning the results.

First, Oracle reported 60% growth in its cloud bookings, even as its cloud subscriptions only grew 24% to $292 million. While the revenue figure is small, compared to overall software revenue of nearly $7 billion in the quarter, the cloud bookings rate is not. Moreover, subscription-based revenue tends to be lower initially, but it often leads to higher lifetime values. In other words, there is likely to be a short-term negative effect as revenue shifts to the cloud. Management also claimed that Oracle added four to five times the amount of customers that Workday did in the quarter.

Second, Oracle CEO Larry Ellison confirmed his aggressive plans to offer infrastructure as a service, or IaaS, in order to be able better sell its applications. In the words of Ellison on the conference call:

Customers are going to come to us and buy our platform in the cloud, and buy infrastructure in the cloud, and move a lot of their existing applications off -- out of their own data centers into our cloud.

Morever, Ellison believes that Oracle's pricing will be competitive with Amazon.com (NASDAQ: AMZN  ) in the IaaS market. With Microsoft, Rackspace, and Google also competing with IaaS offerings, the market is arguably very competitive. However, investors should not be too critical, because Oracle's aim is to use its cash-flow muscle in order to accelerate application software sales by selling IaaS.

Third, other parts of its business are growing well. Hardware sales came back strong because its engineered-systems sales grew 30% in the quarter, and the fast-growing unit now represents 30% of its hardware sales. Also, Ellison talked of very strong growth in data analytics, and he declared his intent to make Oracle the leading player in data analytics.

Where next for Oracle?
Transitioning its revenue to the cloud is going to take time, and there will be hiccups along the way. Investing in IaaS offerings could put some pressure on margins. However, all these moves serve a purpose. Foolish investors should always look at the risk/reward calculation before making a decision over a stock.

Oracle generated $14.4 billion in free cash flow over the last four quarters, a figure that represents nearly 9% of its current enterprise value -- market cap, plus debt. In other words, the market seems to be arguing that Oracle will fail in its purpose, then start to generate significantly smaller cash flow in future. Investors who don't share this view, may see the stock as a great value.

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