By William Trent, CFA of Stock Market Beat
Over the weekend our forecast for Large Cap Watch List member Oracle’s (ORCL – Annual Report) earnings report was that “We think acquisitions will result in upside to estimates though organic growth may disappoint.” Then, we noticed an article suggesting that the company would beat estimates due to a late-quarter sales surge. This worried us, and put us on the alert for “linearity” references when we saw the earnings release:
Third quarter GAAP revenues were up 27% to $4.4 billion, while quarterly GAAP net income was up 35% to $1.03 billion. Total GAAP software revenues were up 25% to $3.5 billion with GAAP database and middleware new license revenues up 17% and GAAP applications new license revenues up 57%. GAAP services revenues were $916 million, up 36% compared to the same quarter last year.Third quarter non-GAAP earnings per share were up 31% to $0.25, and non- GAAP net income was up 30% to $1.3 billion compared to Q3 last year.
The consensus number was for $0.23 on $4.33 billion in revenues. We also saw another article putting the guidance for the coming quarter at $0.34, right in line with the consensus figure. So far, so good. But we still have two problems: there is no breakdown of organic versus acquired growth and there is no clarity on the linearity.
On the conference call, CFO Safra Catz partially addressed the organic growth issue, saying:
Even though we have now owned Siebel for over a year, we got it mid-quarter last year so if you exclude Siebel entirely from both last year and this year, new license revenues were up 32%, still four times the reported growth rate of SAP.
The problem with that cut is that Oracle has since acquired, according to their site, eleven more companies (not counting the recently announced Hyperion deal.) While these were relatively small acquisitions “with most takeovers likely falling in the range of $5 million to $100 million,” as the company described it, five million here and $100 million there and pretty soon you’re talking big money. Catz provided some perspective on the conference call:
We bought a lot of smaller things that are not at scale, and that is one of the reasons that our margins have not been shooting up higher than they are now going, and that is because we have been — we invest in them for a while before they are at scale and then the revenue comes in and then all the marginal revenue is very, very profitable.
Unfortunately, however, the small initial size means the company doesn’t have to keep track of the initial contribution when comparing year/year results.
One positive indicator on that front is the company’s accounts receivable balance, which declined to $2.8 billion from $3.5 billion last quarter and $3.2 billion one year ago, despite the rise in sales. Since customers are generally given some time after ordering to make payment, the later sales occur in the quarter the higher the receivables balance would likely be. The fact that receivables actually declined suggests that earnings may be of much higher quality than investors were expecting, which would account for the rising share price in extended trading.
Catz also addressed the possibility that a couple of very large deals skewed the results:
I know there are rumors of mega-deals in the quarter, a couple at over $100 million, and those rumors are simply not true. Even if you added up the top five deals in the quarter, you do not get to $100 million in new license revenue. You add the top 20, you do not get to $200 million.
Not that the company wouldn’t mind a mega-deal or two, but investors rightly exclude them from forecasts due to their rarity, and prefer to look at them as gravy.
So all in all, it was a good quarter and good guidance – as far as we can tell.
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