Software giant Oracle Corp.'s (ORCL) second quarter fiscal 2011 earnings and revenues easily outpaced the Zacks Consensus Estimates on the back of strong new software license sales (sales to new customers) and growth in hardware sales, boosted by the acquisition of Sun Microsystems in January of this year.
Total revenue, growth in new licensing revenues and earnings per share (EPS) were encouraging and remained well above management’s expectations. The results indicate increased business spending by corporations. However, both new license revenue and total revenue were adversely affected by 2% due to foreign exchange headwinds.
Earnings
Excluding one-time items and stock-based compensation expenses, non-GAAP EPS came in at 51 cents compared with 39 cents in the year-ago quarter. This is above management’s EPS guidance range of 44-46 cents.
Net income rose 34.2% to $2.63 billion from the year-ago period. The rise in earnings was attributable to higher revenues from new software license sales, which grew for the fifth consecutive quarter and will also lead to higher revenues in future quarters from support and maintenance contracts. This also shows that the demand for software is pacing up.
Earnings (excluding one-time items but including stock-based compensation expenses) of 49 cents per share shot up 32.4% from 37 cents in the year-ago period, and surpassed the Zacks Consensus Estimate of 44 cents.
Revenues
Second-quarter total sales increased 47.0% year over year to $8.58 billion, driven by better-than-expected new software license revenues. Excluding revenues related to assumed support software and hardware contracts, which will not be recognized in fiscal 2011 due to certain accounting rules, non-GAAP revenues leaped 47.3% year over year to $8.65 billion. Revenues were above the Zacks Consensus Estimate of $8.30 billion.
Oracle is expected to benefit from its growing software business (65.5% of second quarter total revenue), which was robust across all regions (America, EMEA and Asia) and soared 15.3% year over year to $5.67 billion.
Included in the software segment are new software-license revenues (23.1% of total revenue and 35.3% of total software revenue), which shot up 20.9% to $2.00 billion. New software-license sales were better than the company’s expected growth of 6% to 16% at current exchange rates and 9% to 19% in constant currency.
Database and middleware revenues were $3.86 billion, up 17% from the year-ago quarter. Applications' new license revenues were $579 million, up 21% from the year-ago quarter.
Software license update and product support revenues (42.4% of total revenue and 64.7% of total software revenue) grew 12.5% to $3.67 billion. Customer support attachment and renewal rates were at high levels in the reported quarter.
Technology new-license revenues were $1.4 billion, up 21.0% year over year. Service revenues totaled $1.2 billion, up 24.0% year over year.
Oracle’s hardware systems revenues of $1.80 billion represented 20.8% of the total revenue. Revenues from hardware systems products were $1.11 billion (in line with the company’s expectation of $1 billion to $1.1 billion in constant currency), while revenues from hardware systems support amounted to $686 million.
Oracle remained positive on its growing Exadata pipeline, despite intense competition from International Business Machines Corp.’s (IBM) purchase of Netezza and EMC Corp.’s (EMC) acquisition of Greenplum. The company also aims to beat Hewlett-Packard Company (HPQ) in the high-end server business.
Management expects the Exadata pipeline to grow to $2 billion, up from its previous expectation of $1.5 billion. We believe this will speed up both sales growth and profitability in the Sun server and storage businesses.
Operating Performance
Despite a whopping 60.6% year over year rise in total operating expenses -- mainly due to increased research and development expenses (13% of total revenue) that rose 58.0% to $1.12 billion and sales and marketing expenses (18% of total revenue) that increased 36% to $1.53 billion -- operating income on a non-GAAP basis increased 33.3% to $3.81 billion, aided by increased revenues.
Non-GAAP operating margin of 44.0% was down 500 basis points year over year, due to the addition of lower-margin hardware business. Management highlighted that margins were better than its peers', and were 15% higher than its closest competitor SAP AG (SAP).
Last month, Oracle won $1.3 billion at a trial against SAP. The verdict in favor of Oracle stated that SAP had illegally downloaded millions of password-protected Oracle files.
Liquidity
Strong quarter results helped Oracle generate $8.68 billion in free cash flow, which were 128% of net income. Operating cash flow was $9.05 billion in the quarter. Oracle had $24.85 billion in cash and investments at the end of the quarter, versus $23.60 billion in the previous quarter. Days’ sales outstanding totaled 46 days.
In the reported quarter, Oracle repurchased 9.1 million shares for a total of $250 million. Oracle also declared a cash dividend of 5 cents per share to stockholders of record as of the close of business on January 19, 2011, to be paid on February 9, 2011.
Third Quarter Guidance
For the third quarter, Oracle expects non-GAAP EPS in constant currency to range from 48 cents to 50 cents. Assuming the current exchange, EPS is expected to range from 48 cents to 50 cents. This is up from 38 cents reported in the comparable quarter last year and above the Zacks Consensus Estimate of 44 cents.
Oracle expects 1% positive currency effect on license growth rates and 1% positive effect on total revenue growth. Total revenue growth on a non-GAAP basis is expected to range from 31% to 35% at current exchange rate and 30% to 34% in constant currency. The guidance assumes a non-GAAP tax rate of 29.5%.
New software-license revenue growth is expected to range from 10% to 20% at current exchange rates and 9% to 19% in constant currency. Excluding hardware support revenues, hardware product revenues are expected to be $1.1 billion to $1.2 billion.
Maintain Neutral
The limited number of estimate revisions in the run up to the earnings release points to the fact that there are no major catalysts that could drive shares. However, we are positive on the company's longer-term growth prospects based on its growing market share, new product pipeline, incremental cost savings, robust cash flow, improved margin and high recurring revenues.
Oracle is currently rated as a Zacks #3 Rank (short-term Hold). Over the long term, we maintain our Neutral rating on the stock.
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