EUR 850.00 For Business Accounts Only

Morningstar | Oracle Parks Cash in Share Buybacks for Third Straight Quarter; Maintaining $46 FVE

Wide-moat Oracle's third-quarter earnings report was largely in line with our expectations. The firm reported a slight decline in revenue year over year as cloud services and license support growth could not make up for the currency headwinds and declines in Oracle’s other three business segments. Cloud services and license support made up 69% of revenue in the third quarter of fiscal 2019, a drastic rise from the 59% it contributed in fiscal 2016. We believe the sustained revenue growth in this division shows why the company warrants a wide moat rating and is indicative of the switching costs that customers face in trying to transition away from Oracle.

Fusion, NetSuite, and SaaS ERP and HCM continue to be bright spots with growth rates all surpassing the mid-20s, but these segments are still growing off too small of a base to affect the top line meaningfully. The stock was trading down after hours as we believe investors are still looking for clarity on the long-term drivers of the business. We are maintaining our $46 fair value estimate and advise investors to remain on the sidelines until a better entry point emerges.

Oracle spent roughly $10 billion on share repurchases in the third quarter. This marks the third quarter in a row the company has repurchased nearly $10 billion in shares. With 728 million shares repurchased over the last four quarters, Oracle has reduced shares outstanding by almost 16%. Although we forecast research and development expense and capital expenditure to decline in fiscal 2019 for the second straight year on an absolute basis, we do not believe this massive buyback program has left Oracle underinvested for future growth opportunities. We anticipate Oracle will continue its "fast follower" strategy and use its strong free cash flow to make a strategic acquisition in the next few years to make up for any perceived underinvestment in future growth opportunities.

Autonomous database continues to show moderate progress, as customer trials grew from 1,000 per month in the second quarter of fiscal 2019 to 1,333 per month in the third quarter. Management said customers are reporting that cost savings and performance are as advertised compared with competitors, and with referenceable customers expected to exceed 100 in the near term, we believe this should help drive adoption with other enterprises. Autonomous database could become a revenue driver into the future, but we expect it will be several years before it materially affects the top line.