Investors got some mixed news on Sept. 12 when Oracle (ORCL -0.30%) posted its fiscal 2023 first-quarter earnings report (for the quarter ending Aug. 31).
The database software giant's revenue, boosted by its acquisition of Cerner in June, rose 18% year over year (23% in constant currency terms) to $11.45 billion, and met analysts' expectations. But its adjusted net income fell 4% to $2.83 billion, while its adjusted earnings per share -- buoyed by buybacks -- stayed flat year over year at $1.03 and missed the consensus forecast by four cents. On a GAAP (generally accepted accounting principles) basis, its net income declined 37% year over year to $1.55 billion, or $0.56 per diluted share.
Those numbers were a bit messy and left some wondering what it all means for Oracle stock. So let's cut through the noise and see if Oracle's shares are still worth buying in this tough market for tech stocks.
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Oracle's cloud-based transformation
Over the past decade, Oracle expanded its cloud-based database, infrastructure, enterprise resource planning (ERP), and human capital management (HCM) services to offset the slower growth of its on-site database services. It acquired dozens of companies to accomplish that transformation.
Oracle's revenue growth stalled out in fiscal 2019 and fiscal 2020, which ended in May of the calendar year. That stall out prompted some bears to claim it could suffer the same fate as IBM (IBM 0.18%) as the declines of its legacy businesses overwhelmed the growth of its newer cloud-based services.
However, Oracle's revenue rose 4% in fiscal 2021 and grew 5% in fiscal 2022 as more enterprise customers adopted its Oracle Cloud Infrastructure (OCI), Fusion ERP, and Netsuite ERP services. It believes its $28 billion takeover of Cerner, which was entirely paid in cash, will accelerate that growth by expanding its reach into the healthcare market.
Can Oracle keep growing organically?
Some investors questioned whether Oracle can continue to grow organically. Excluding its purchase of Cerner, Oracle's organic revenue rose 8% year over year in constant currency terms during the first quarter, compared to its 2% constant currency sales growth a year ago. If it hadn't exited Russia, its organic revenue would have risen more than 9%.
Oracle's total cloud services revenue, including Cerner, jumped 50% year over year in constant currency terms to $3.6 billion, or 31% of its top line. Excluding Cerner, its cloud services revenue still grew 29% year over year organically to $3.1 billion in constant currency terms. That growth was mainly driven by OCI, Netsuite ERP, and Fusion's ERP and HCM services.
Within that total, its cloud infrastructure services revenue surged 58% year over year in constant currency terms. Therefore, OCI is actually growing faster than its larger "hyperscale" cloud infrastructure competitors like Amazon (AMZN 1.49%) Web Services (AWS) and Microsoft's (MSFT 0.46%) Azure.
During the conference call, CEO Safra Catz pointed out that Oracle now hosts "cloud regions in more countries and cities than AWS and Azure." Catz also said Oracle still expected the organic revenue growth of its cloud services to "accelerate substantially" to more than 30% in fiscal 2023 -- compared to its 22% growth in fiscal 2022.
Furthermore, Oracle's remaining performance obligations (RPO), or the future revenue it expects to recognize from its current contracts, increased 22% year over year organically in the first quarter and accelerated from its 17% growth in the fourth quarter. All these numbers suggest Oracle's organic sales growth will remain stable for the foreseeable future.
For the second quarter, Oracle expects its revenue to rise 15%-17% as reported, and to grow 21%-23% in constant currency terms. Analysts expect its reported revenue to increase 17% for the full year.
Can Oracle keep generating steady earnings growth?
Oracle bought back nearly half its outstanding shares over the past 10 years, and it's paid uninterrupted dividends since 2009. Its trailing 12-month free cash flow (FCF) notably declined 57% year over year to $5.37 billion after it bought Cerner, but it can still easily cover its buybacks and dividend payments. During the first quarter, it spent $559 million on buybacks and $860 million on dividends. It currently pays a forward yield of 1.7%.
During the conference call, Catz reiterated the company's "fundamental principle" for growing its "non-GAAP EPS while substantially increasing cloud revenue." She also expects Cerner to be accretive to its second quarter and full-year EPS.
However, Catz warned that the near-term currency headwinds would reduce its non-GAAP EPS by 1%-5% in the second quarter. But on a constant currency basis, Catz still expects its non-GAAP EPS to increase 1%-5%. For the full year, analysts expect Oracle's non-GAAP EPS to grow 7% on a reported basis.
Oracle is still a rock-solid investment
Oracle's acquisition of Cerner inflated its near-term growth rates, and its long-term prospects still seem bright. Its cloud businesses keep accelerating on an organic basis, it still has plenty of cash to cover its buybacks and dividends, and the stock is still surprisingly cheap at 15 times forward earnings. Oracle might not offer enough excitement for growth-oriented investors, but it's a great option for patient investors who are looking for a safe haven in this tumultuous market.
