Oracle Corp.’s (ORCL) first quarter 2011 earnings and revenues easily outpaced the Zacks Consensus Estimates on the back of strong new software license (sales to new customers) sales and growth in hardware sales, boosted by the acquisition of Sun Microsystems in January this year. The results indicate increased business spending by corporations.
Total revenue was above the high end of the company’s guided range. Moreover, the growth in new licensing revenues and earnings per share (EPS) were encouraging and remained well above management’s expectation.
Investors were optimistic on the company’s results, which uplifted the share price by 4.61% to close at $26.53 in after-market trading, following the earnings announcement. The detailed analysis is as follows:
Earnings
Excluding one-time items and stock-based compensation expenses, non-GAAP EPS came in at 42 cents compared with 30 cents in the year-ago quarter. This is 5 cents above the high end of management’s EPS guidance range of 35 cents to 37 cents.
Earnings (excluding one-time items but including stock based compensation expenses) of 39 cents per share were up 34.5% from the year-ago period of 29 cents, and 4 cents above the Zacks Consensus Estimate of 35 cents.
Net income rose 37.4% to $2.00 billion from the year-ago period. The rise in earnings was attributable to higher revenues from new software license sales, which grew for the fourth consecutive quarter. This will lead to higher revenues in the future quarters from support and maintenance contracts. This shows that the demand for software is pacing up.
Revenues
First quarter total sales were up 48.4% year over year at $7.50 billion, due to better-than-expected new software license revenues. Excluding revenues related to assumed support contracts, which will not be recognized for fiscal 2011 due to certain accounting rules, non-GAAP revenues leaped 49.9% year over year to $7.59 billion. Revenues were above the Zacks Consensus Estimate of $7.29 billion.
Oracle is expected to benefit from its growing software business (62.7% of total revenue), which was robust in the first quarter across all regions and soared 14.6% year over year to $4.76 billion.
Included in the Software segment, new software license revenues (16.9% of total revenue and 27.0% of total software revenue) shot up 25.1% to $1.29 billion. New software license sales were better than the company’s expectation of a growth in the range of 2% to 12% in constant currency. This reflects substantial strength in Oracle’s database and Middleware business that grew 17.0% year over year to $3.25 billion. Applications revenues were $1.48 billion, up 8% from the year-ago quarter.
Software license update and product support revenues (45.8% of total revenue and 73.0% of total software revenue) were up 11.2% to $3.48 billion. Customer support attachment and renewal rates were at near record levels in the quarter.
Technology new license revenues summed up to $937.0 million, up 32.0% year over year. Service revenues (14.0% of total revenue) totaled $1.07 billion, up 18.0% year over year.
Oracle’s new Hardware Systems revenues of $1.76 billion represented 23.2% of the total revenue. Revenues from hardware systems products were $1.08 billion (in line with the company’s expectation of $1 billion) while revenues from hardware systems support amounted to $680 million in the quarter.
On a geographical basis, revenues in America and Europe, Middle East & Africa (EMEA) region were strong and witnessed a growth of 46.2% and 45.0% year over year, respectively. Asia-Pacific was also up 64.2% year over year, highlighting the strength and diversity of Oracle’s business. Management pointed out that there were no unusually large deals in the quarter.
Operating Performance
Despite a rise in total operating expenses by 69.0%, mainly due to increased research and development expenses (15% of total revenue) that rose 67.0% to $1.1 billion, operating income on a non-GAAP basis spiked up 27.1% to $2.94 billion, aided by increased revenues. The tax rate for the first quarter was 24.7%, due to one-time benefits.
Non-GAAP operating margin of 39.0% was down 700 basis points year over year. Management highlighted that margins were better than its peers, including International Business Machines Corp. (IBM), and were 10% higher than its closest competitor SAP AG (SAP).
The strong results helped Oracle generate $8.50 billion in free cash flow over the last twelve months, which were 133% of net income. Operating cash flow was $3.82 billion in the quarter. Oracle had $23.6 billion in cash and investments at the end of the quarter versus $18.5 billion in the previous quarter. Days’ sales outstanding improved to 45 days from 46 days in the year-ago period.
In the reported quarter, Oracle repurchased 10.8 million shares for a total of $250 million. Oracle also declared a cash dividend of 5 cents per share.
Second Quarter Guidance
Management’s second quarter 2011 guidance was above the Zacks Consensus Estimate and also beat the Wall Street forecast.
For the second quarter, Oracle expects non-GAAP EPS in constant currency to range between 45 cents to 47 cents. Assuming current exchange, EPS is expected to range between 44 cents to 46 cents. This is up from 39 cents reported last year and above the Zacks Consensus Estimate of 43 cents. Management pointed out that the pipeline for both the software and hardware remains strong.
Oracle expects 3% negative currency effect on license growth rates and 4% negative effect on total revenue growth. Total revenue on a non-GAAP basis is expected to range between 39% and 43% in the second quarter at current exchange rates and 43% to 47% in constant currency. The guidance assumes a non-GAAP tax rate of 28.5%.
New software license revenue growth is expected to range from 6% to 16% at current exchange rates and 9% to 19% in constant currency. Excluding Hardware support revenues, Hardware product revenues are expected to be $1.0 billion to $1.1 billion in constant currency or $1.1 billion to $1.2 billion at current exchange rates.
Details on Sun’s Acquisition
Oracle made it clear that it will no longer be selling products at a loss as Sun did, which implies more profit on lower revenues. To this end, management announced that it will stop sales of Hitachi Ltd.’s (HIT) discs.
Management reiterated its financial expectation from Sun. The acquisition is expected to be accretive to its earnings by at least 15 cents per share on a non-GAAP basis in 2011. Oracle expects Sun to exceed the company’s targets for fiscal 2011 and 2012. 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. Revenues from Sun Microsystems are expected to be $9.6 billion in 2011.
With the Sun acquisition, Oracle is expected to emerge as the foremost player in the database software market, including high-end servers. Management expects to dig into IBM’s market share in the hardware segment over time.
Oracle also remained upbeat on its Sun Exadata database machine product as it continued to win new customers in the quarter. Sun Solaris servers and Exadata are expected to help Oracle increase revenues, going forward. The Exadata product line is making inroads against its competitors such as Teradata Corp. (TDC), Netezza Corp. (NZ) and IBM.
Oracle anticipates that Exadata pipeline will grow to $1.5 billion in 2011, up from previous expectation of $1 billion. We believe this will speed up both sales growth and profitability in the Sun server and storage businesses.
Former Hewlett-Packard Company (HPQ) CEO Mark Hurd, who recently joined Oracle as co-president, announced forthcoming developments for the company. At OpenWorld Oracle next week, management plans to unveil two new high-end systems combining Sun hardware and Oracle software to compete against its software rival SAP. Management plans to spend $4 billion for research and development in fiscal 2011, which will likely boost the company’s product offerings.
Oracle shares currently have a Zacks #2 Rank (Buy), though its longer-term recommendation is Neutral.
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