Oracle Corporation’s (ORCL) third-quarter of fiscal 2010 earnings (excluding one-time items but including stock-based compensation expenses) of 36 cents per share were up 5.9% from the year-ago period of 34 cents, but in line with the Zacks Consensus Estimate of 36 cents. Earnings also came in line with the company’s guidance of 36 – 38 cents per share.
Net income rose 8.1% to $1.83 billion from the last year. The boost in earnings was due to higher revenues from new software license sales. The results included a one-month contribution from Sun Microsystems, since the acquisition closed at the end of January.
Although Oracle’s quarterly earnings were in line with the Zacks Consensus Estimates, investors were more than optimistic on the company’s results and expected it to report above expectations. The optimism had driven the company’s stock price to a nine-year high earlier in the day, but the shares fell back slightly in after-market trading.
Revenues
Second quarter total sales were up 17.4% year over year to $6.40 billion due to better-than-expected new software license revenue. Excluding revenue related to assumed support contracts, which will not be recognized for the remainder of fiscal 2010 and fiscal 2011 due to certain accounting rules, non-GAAP revenue increased 17.5% year over year to $6.47 billion.
Oracle acquired Sun Microsystems on January 26, 2010. Excluding the $596 million revenue from Sun, total revenue grew 7% in the quarter on a stand-alone basis. Total revenue on a stand-alone basis was above the high-end of the company’s guidance range.
The company is expected to benefit from its growing software business, which was robust in the third quarter and increased 12.4% year over year to $5.04 billion. Included in the Software segment, new software license revenue (27% of total revenue) was up 13.3% to $1.72 billion and was up 8% on a constant currency basis. It was also up 10% excluding $46 million contributed from Sun.
This was better than the company’s revenue expectation of a growth of 9%, and shows substantial strength in Oracle’s database, Middleware and applications business. The growth in new licensing revenues was very encouraging and was the strongest growth in seven quarters.
Technology new license revenue was $1.2 billion, up 11% year over year. Applications for new license revenue grew 21% from last year, which is very strong. The company said that for the fifth consecutive quarter, it has captured market share from SAP AG (SAP), who is the leader in Application business. Oracle is further expected to benefit from new product launches such as the Project Fusion, an upgraded Oracle’s business application software which will hit the market this year.
Also, with the Sun acquisition, Oracle is expected to become the foremost player in the database software market, including high-end servers (ahead of International Business Machines [IBM], its primary competitor). The company also remained upbeat on its Exadata product, introduced last year. The Exadata portfolio delivered $400 million in revenue with a fourth quarter bookings forecast of $100 million. This strengthens both sales growth and profitability in the Sun server and storage businesses, the company said.
Software license update and product support revenue (51% of total revenue) was up 12% to $3.30 billion, and up 8% on a constant currency basis. This included a $25 million contribution from Sun and was above the company’s expectations excluding Sun. Customer support attachment and renewal rates were at near record levels in the quarter.
Services revenue (15% of total revenue) was $931 million, down 13% on a constant currency basis and down 9% in U.S. dollars year over year. The company’s new Hardware Systems revenue represented 7% of the total revenues. Revenues from hardware systems products were $273 million while revenues from hardware systems support were $224 million in the quarter.
Operating Performance
Despite a rise in total operating expenses by 21.5%, operating income on a non-GAAP basis increased 13% to $2.89 billion. However, increased revenue resulted in an operating margin of 45%, down 100 basis points year over year. This was substantially higher than Oracle’s nearest competitor IBM and above SAP’s target, the company said.
The strong results helped Oracle generate $8.0 billion in free cash flow over the last twelve months. Operating cash flow was $8.2 billion on a trailing twelve-month basis. The company had $17.5 billion in cash and investments at the end of the quarter. In the quarter, the company repurchased 10.3 million shares for a total of $250 million. The company also declared a cash dividend of 5 cents per share.
Guidance
The fourth quarter 2010 guidance included the impact of the Sun acquisition. For the fourth quarter, Oracle expects non-GAAP earnings per share to range between 52–56 cents. This is up from 46 cents last year and from 50–54 cents in constant currency.
Assuming current exchange rates, the company expects 3% positive currency effect on license growth rates and 4% effect on total revenue growth. Total revenue on a non-GAAP basis is expected to rise by between 36% and 41% in the fourth quarter, at the current exchange rates and 32% to 37% in constant currency. The guidance assumes a non-GAAP tax rate of 28%.
New software license revenue growth is expected to range from 3%-13% at current exchange rates and flat to up 10% in constant currency. Hardware product revenues are expected to range from $1.2 billion to $1.3 billion. However, management expects lower percentage of deals in the pipeline to close during the current quarter.
Management reiterated the previous contribution from Sun to Oracle’s business. The acquisition is expected to be accretive to its earnings by at least 15 cents per share on a non-GAAP basis in 2011. The acquired business will contribute over $1.5 billion to Oracle’s non-GAAP operating profit in 2011, increasing to over $2 billion in 2012. Revenue from Sun Microsystems is expected to be $9.6 billion in 2011.
The company said that it will no longer be selling products at a loss as Sun did, which means more profit on lower revenue. We believe the Sun acquisition will be an impetus to growth in fiscal 2011 and beyond. We expect the increased synergies to strengthen the company’s competitive position as the combined portfolio gains traction. If successful, Oracle’s new strategies would lead to higher top and bottom-line growth.
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