Oracle Corp. (ORCL) reported disappointing second quarter 2012 results, with earnings of 53 cents per share missing the Zacks Consensus Estimate by 2 cents. Total revenue also came in below the Zacks Consensus Estimate of $9.23 billion.
Earnings per share (excluding one-time items but including stock-based compensation expenses) increased 14.7% from 46 cents in the year-ago quarter. Excluding one-time items and stock-based compensation expenses, non-GAAP earnings stood at 54 cents per share compared with 51 cents per share in the year-ago quarter. This was well below management's guided range of 56 cents to 58 cents per share.
The earnings miss resulted from sluggish growth in software sales coupled with declining hardware revenue. Oracle also provided cautious third quarter 2012 revenue guidance and expects significant currency volatility going forward.
Total revenue in the reported quarter increased a modest 2.0% year over year to $8.81 billion. This was, however, well below management's guided range of 4.0% - 8.0%. The miss was primarily attributed to sluggish new software license sales, which rose only 2.5% year over year to $2.05 billion in the quarter. Oracle reported that delay in deal approval in some regions and currency headwinds were responsible for this lackluster growth.
Although Software license update and product support revenues (46.0% of the total revenue) grew a healthy 9.4% to $3.99 billion, it failed to compensate for the weakness in new software sales. As a result, total software revenue (69.0% of the total revenue in the second quarter) climbed 6.7% year over year to $6.04 billion, recording its slowest growth over the last 12 months.
Hardware systems continued to disappoint with revenues declining 10.0% year over year to $1.58 billion. Revenues from hardware systems products were $953.0 million, down 14.3% year over year, while revenues from hardware systems support amounted to $625.0 million, down 7.6% year over year.
The decline in hardware sales was primarily attributed to shift in product mix as customers were apprehensive about purchasing older systems and moved their orders to new T4 processor-based products, which significantly reduced volumes during the quarter. Although Oracle witnessed good demand for the new SPARC Supercluster, the product was released at the fag end of the quarter and thus failed to impact hardware volumes.
We also believe that lower IT spending in the quarter owing to the sluggish macro environment prevailing in both the U.S. and Europe/Middle East/Africa (EMEA), may have also contributed to this decline. Hardware systems product revenues declined a massive 17.0% in both EMEA and Americas, while it crept up 2.0% in the Asia-pacific.
Database and middleware revenues were $4.19 billion, up 8.4% from the year-ago quarter. Applications revenues were $1.85 billion, up 3.8% from the year-ago quarter. Service revenues totaled $1.18 billion, flat on a year-over-year basis.
Operating income on a non-GAAP basis (excluding one-time items but including stock-based compensation expenses) increased 5.9% to $3.78 billion, driven by lower operating expenses. Non-GAAP operating margin surged 170 bps year over year to 42.9%, due to higher-margin software business.
Total operating expenses inched down 1.0% in the quarter, mainly due to flat general and administrative expenses and declining research & development expense (down 1.5%), which fully offset higher sales and marketing expenses (up 10.9% to $1.70 billion).
Net Income was $2.63 billion (excluding one-time items but including stock-based compensation expenses) compared with $2.39 billion in the year-ago period. Net income margin expanded 120 basis points (bps) in the quarter.
Oracle generated $12.63 billion in free cash flow, which was 135% of the net income in the second quarter. Operating cash flow was $13.13 billion. Oracle had $31.01 billion in cash and marketable securities at the end of the quarter versus $31.66 billion in the previous quarter. In the reported quarter, Oracle repurchased 33.1 million shares.
For the third quarter of 2012, Oracle expects non-GAAP earnings in the range of 55 cents to 58 cents per share. Third quarter 2012 earnings guidance is significantly higher than both the year-ago level and the Zacks Consensus Estimate of 54 cents per share.
Total revenue on a non-GAAP basis is expected to grow in the range of 1.0% to 5.0%. New software license revenue growth is expected to range from flat to up 10.0%. Hardware product revenue is expected to decline in the range of 5.0% to 15.0% for the third quarter.
We believe that Oracle's disappointing second quarter reflects a slowdown in enterprise IT spending, which will hurt its new software sales growth in the near term. Oracle is expected to face tough year-over-year comparisons in the upcoming third quarter (new software sales increased 29.0% in the third quarter of 2011) and this coupled with currency volatility will dampen top-line growth going forward.
Moreover, lower hardware volumes also remain a concern in the near term. We believe that Oracle will take at least another three to four quarters to achieve top-line growth in the hardware segment. As Oracle sells higher margin products compared to its competitors, we believe that a sluggish market and lower IT spending may hurt its hardware volume going forward.
Notwithstanding these near-term headwinds, we believe that Oracle possesses a strong product pipeline, which will drive broad-based top-line growth going forward. Moreover, strong adoption of Exadata, Exalogic, the core SPARC product line and fusion systems will drive incremental top-line growth going forward. We expect this strong product portfolio to provide Oracle a competitive edge over International Business Machines Corp. (IBM) and SAP AG (SAP) going forward.
We maintain a long-term (6-12 months) Neutral recommendation on Oracle. Currently, Oracle has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.
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