Sell Oracle Into Earnings – Seeking Alpha

34
142
Sell Oracle Into Earnings – Seeking Alpha

Source: Barron

Source: Barron’s

Oracle (ORCL) reports quarterly earnings Wednesday. Analysts expect revenue of $10.95 billion and EPS of $1.07. The revenue estimate implies a 3% decline Y/Y. Investors should focus on the following key items:

The Decline Continues

Oracle provides services that address various aspects of a company’s information technology environment – application, platform, and infrastructure. Revenue from its cloud offerings had been growing at double digits, while On-Premise software had been growing in the low single digits. The company’s $9 billion acquisition of cloud services company NetSuite in late 2016 came with a lot of fanfare. It jumpstarted Oracle’s top line and gave investors the impression ORCL was a growth stock. However, the company’s organic growth is now in decline, offset by cost takeouts and stock buybacks.

Last quarter, total revenue of $9.7 billion fell 1% Y/Y. This followed flat revenue growth for the quarter-ended November 2018. The trend in revenue growth has turned negative and it could deteriorate further.

Oracle revenue growth

Cloud Services and License Support revenue was up 1%. Every other operating segment experienced a decline in revenue. Cloud Services and License Support generated 69% of total revenue. This segment represents a moat for the company, and the lion’s share of its revenue is recurring.

Over 30% of Oracle’s revenue is in decline. Hardware is being hit the hardest, falling by high single-digits. This segment provides hardware and hardware-related software products like servers, storage, and operating systems. It represents 10% of total revenue and its headwinds could continue. I would like to hear from management how it plans to stop the deterioration in Hardware, if at all.

What Levers Will Oracle Pull?

Despite stagnant to declining revenue growth, Oracle has levers to pull. The company has over $6 billion of operating expenses it can cut into. Last quarter, operating costs fell 2% Y/Y, outstripping the decline in revenue. Oracle has been gradually cutting costs each quarter in order to spur operating income growth. Last quarter was no different. The biggest cuts came in hardware (down 14%), R&D (down 5%), and general and administrative expenses (down 7%). Costs related to Cloud Services and License Support actually grew 5%. This makes sense since this segment is the growth engine.

The fallout from the cuts to spending was that operating income grew 3%. Operating income margin of 35% was up 300 basis points versus the year-earlier period. I expect management to make deep cuts to operating expenses again this quarter. Though earnings are growing, I question the quality of those earnings and how to value them.

Is Oracle Ruining Its $40 Billion War Chest?

Oracle has cash and marketable securities of $40 billion. This is down from $66 billion in May 2018. Its cash hoard could be used to acquire other technology companies, assuming Oracle could find some at attractive prices. In this frothy market, that could be a difficult task. Management has also engaged in share buybacks at around $10 billion per quarter. Share buybacks usually imply management believes its shares are undervalued. Why anyone would think that buying shares in a company whose top line is in decline is a good idea is beyond me. Maybe it’s a pride thing for management to keep Oracle’s share price elevated.

Certain analysts have questioned whether Oracle’s buybacks are sustainable. Oracle’s liquidity has declined by over $25 billion and what does the company have to show for it? I too believe the company could be forced to reduce or end its buyback program. This could remove an important catalyst for the stock.

Conclusion

ORCL is up about 20% Y/Y. Its declining revenue growth and potential reduction in share buybacks make the stock a sell.

I also run the Shocking The Street investment service as part of the Seeking Alpha Marketplace. You will get access to exclusive ideas from Shocking The Street, and stay abreast of opportunities months before the market becomes aware of them. I am currently offering a two-week free trial period for subscribers to enjoy. Check out the service and find out first-hand why other subscribers appear to be two steps ahead of the market.

Pricing for Shocking The Street is $35 per month. Those who sign up for the yearly plan will enjoy a price of $280 per year – a 33% discount.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

34 COMMENTS

  1. I just want to tell you that I’m newbie to blogging and actually loved this blog. Very likely I’m going to bookmark your blog . You amazingly have wonderful articles and reviews. Thank you for revealing your website.

  2. naturally like your web site however you have to take a look at the spelling on several of your posts. Several of them are rife with spelling problems and I find it very bothersome to tell the reality then again I’ll certainly come back again.

  3. MetroClick specializes in building completely interactive products like Photo Booth for rental or sale, Touch Screen Kiosks, Large Touch Screen Displays , Monitors, Digital Signages and experiences. With our own hardware production facility and in-house software development teams, we are able to achieve the highest level of customization and versatility for Photo Booths, Touch Screen Kiosks, Touch Screen Monitors and Digital Signage. Visit MetroClick in NYC at http://www.metroclick.com/ or , 121 Varick St, New York, NY 10013, +1 646-843-0888

  4. I do not know if it’s just me or if perhaps everybody else experiencing problems with your website. It seems like some of the text in your posts are running off the screen. Can somebody else please comment and let me know if this is happening to them too? This may be a problem with my web browser because I’ve had this happen previously. Appreciate it

  5. I’m really impressed together with your writing abilities and also with the layout in your blog. Is that this a paid subject matter or did you modify it your self? Either way stay up the excellent quality writing, it’s rare to see a great weblog like this one nowadays..

  6. MetroClick specializes in building completely interactive products like Photo Booth for rental or sale, Touch Screen Kiosks, Large Touch Screen Displays , Monitors, Digital Signages and experiences. With our own hardware production facility and in-house software development teams, we are able to achieve the highest level of customization and versatility for Photo Booths, Touch Screen Kiosks, Touch Screen Monitors and Digital Signage. Visit MetroClick in NYC at http://www.metroclick.com/ or , 121 Varick St, New York, NY 10013, +1 646-843-0888

  7. I do agree with all of the ideas you’ve offered to your post. They are really convincing and can definitely work. Still, the posts are too short for starters. Could you please prolong them a bit from next time? Thank you for the post.

  8. MetroClick specializes in building completely interactive products like Photo Booth for rental or sale, Touch Screen Kiosks, Large Touch Screen Displays , Monitors, Digital Signages and experiences. With our own hardware production facility and in-house software development teams, we are able to achieve the highest level of customization and versatility for Photo Booths, Touch Screen Kiosks, Touch Screen Monitors and Digital Signage. Visit MetroClick in NYC at http://www.metroclick.com/ or , 121 Varick St, New York, NY 10013, +1 646-843-0888.

  9. I know this if off topic but I’m looking into starting my own blog and was wondering what all is needed to get setup? I’m assuming having a blog like yours would cost a pretty penny? I’m not very web smart so I’m not 100% certain. Any recommendations or advice would be greatly appreciated. Thanks

  10. I have discovered that charges for internet degree experts tend to be an awesome value. For instance a full Bachelors Degree in Communication in the University of Phoenix Online consists of Sixty credits with $515/credit or $30,900. Also American Intercontinental University Online offers a Bachelors of Business Administration with a full school element of 180 units and a tuition fee of $30,560. Online studying has made getting your degree far less difficult because you can easily earn the degree from the comfort of your dwelling place and when you finish from work. Thanks for all your other tips I have learned from your blog.

  11. Definitely believe that which you said. Your favorite reason appeared to be on the web the simplest thing to be aware of. I say to you, I definitely get irked while people consider worries that they plainly do not know about. You managed to hit the nail upon the top and also defined out the whole thing without having side-effects , people can take a signal. Will probably be back to get more. Thanks

  12. I simply want to inform you that I am new to blogging and utterly adored your post. Most likely I am probably to store your blog post . You indeed have extraordinary article information. Be Thankful For it for telling with us your own domain write-up

  13. Hello, I think your website might be having browser compatibility issues. When I look at your website in Chrome, it looks fine but when opening in Internet Explorer, it has some overlapping. I just wanted to give you a quick heads up! Other then that, excellent blog!

  14. obviously like your website but you have to check the spelling on quite a few of your posts. Several of them are rife with spelling issues and I find it very troublesome to tell the truth nevertheless I will surely come back again.

  15. I’m impressed, I need to say. Really rarely do I encounter a weblog that’s both educative and entertaining, and let me inform you, you will have hit the nail on the head. Your concept is outstanding; the problem is something that not enough individuals are talking intelligently about. I’m very happy that I stumbled across this in my seek for one thing regarding this.

  16. I want to show my thanks to this writer for bailing me out of this scenario. Because of exploring throughout the online world and seeing proposals which were not powerful, I assumed my life was done. Being alive without the presence of strategies to the difficulties you’ve fixed by way of this blog post is a critical case, and those which may have in a wrong way damaged my entire career if I hadn’t come across your web blog. Your main training and kindness in touching a lot of things was invaluable. I am not sure what I would’ve done if I hadn’t come upon such a thing like this. I can also now look forward to my future. Thanks so much for the reliable and results-oriented guide. I won’t be reluctant to suggest your web page to anyone who ought to have guidelines about this problem.

  17. Hello, Neat post. There’s a problem together with your website in internet explorer, would check this… IE nonetheless is the marketplace leader and a big part of other folks will pass over your great writing because of this problem.

LEAVE A REPLY

Please enter your comment!
Please enter your name here