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Software giant Oracle (NASDAQ: ORCL) posted better-than-expected quarterly results after the closing bell on Tuesday, and the stock popped 4% in after-hours trading.
The past year has been a mixed bag for the technology giant. As of its Tuesday closing price, shares are down 7% over the last 12 months. Recently, though, Oracle stock has performed better; the stock is up 6% year-to-date.
Oracle has invested heavily in new products designed to capitalize on the most pressing needs in the technology and software businesses. Specifically, Oracle is focusing its future on the cloud, and it is starting to see impressive results.
Oracle earnings in this quarterly report was a mixed bag, as well. Oracle beat analyst expectations on earnings, but missed on revenue. However, Oracle showed important progress in its efforts to build its cloud business. As a result, investors are feeling better about the company after this quarterly report.
Oracle Earnings Reflect Shift
For the fiscal third quarter, Oracle earned $0.64 per share in adjusted profit, on $9 billion of revenue. Earnings beat analyst forecasts by $0.02 per share, while sales came up short by about $100 million.
On a year-over-year basis, Oracle managed 1% revenue growth in constant currency.
Oracle, like many other technology companies such as Microsoft (NASDAQ: MSFT), are increasingly viewed as “old tech.” Investors are concerned that these companies, which had an iron-clad grip on the personal computer market, might fall behind in the post-PC era.
Last quarter, revenue from Oracle’s hardware business declined 8% in constant currency. The good news is that this segment is slowly becoming less important to the company. Oracle’s total hardware revenue now represents 13% of its total revenue, down one percentage point year over year.
For that reason, Oracle is busily moving its business focus to the cloud. That business produced excellent results in the last quarter. Revenue from cloud software as a service soared 57% year over year. Excluding foreign exchange effects, Oracle’s constant-currency revenue in the cloud SAAS business rose 61%. Separately, cloud infrastructure as a service revenue increased 2% in constant currency.
For the quarter, Oracle’s total cloud revenues soared 44% in constant currency, to $735 million. As Oracle gradually reduces its dependence on hardware, its cloud business is becoming more prominent. Total cloud and on-premise software revenue represents 78% of Oracle’s total revenue, which is up one percentage point year over year.
In addition to its quarterly results, Oracle pleased its investors by announcing a major addition to its capital return program. The company said it will increase its stock repurchase authorization by an extra $10 billion.
Oracle also pays a dividend, as part of its cash return policy. The stock currently yields 1.5%. And, it has been an aggressive dividend grower, thanks to its improving fundamentals and strong cash flow. Over the past five years, Oracle has lifted its dividend by 20% each year on average.
Will Oracle Make a Big Acquisition?
In a highly competitive industry, companies like Oracle need to constantly stay on top of the changing technological landscape.
Oracle is in the enviable position of generating significant cash flow; the company raked in $8.8 billion of free cash flow over the first three fiscal quarters. The cash is piling up on Oracle’s balance sheet. The company holds $50 billion in cash, cash equivalents and marketable securities on its books.
With interest rates still near historic lows, this cash is burning a hole in Oracle’s pocket. The company raised its stock buyback, although it should generate enough free cash flow this fiscal year alone to cover its $10 billion repurchase program.
If the company deploys some of its spare cash on hand, it could pursue M&A in a big way. It could make sense for Oracle to use some of its cash, since the cash is doing little for shareholders sitting on the balance sheet. And it makes strategic sense as well: Oracle could tap into M&A to advance its cloud business even further, or make inroads in newer focus areas like cybersecurity.
Whatever route the company takes, 2016 is shaping up to be a very exciting year for Oracle.
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