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Oracle Earnings: Story Still All About Legacy and Cloud

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March 16, 2018
Oracle Earnings: Story Still All About Legacy and Cloud
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As a tech mega-cap worth about $216 billion that operates extensively throughout the world across a wide range of end markets, Oracle (ORCL) is a company that is widely followed by many analysts and investors.

Its next quarterly report is around the corner and Oracle (ORCL) is scheduled to report third-quarter fiscal 2018 earnings after the closing bell on Monday, Mar. 19.

Here’s a quick recap of what ORCL reported for Q2 fiscal 2018:

  • Adjusted earnings per share (EPS) of $0.70, up from $0.61 in the prior-year quarter
  • Total revenues increased 6% year-over-year (YoY) to $9.6 billion
  • Overall cloud revenue was up 44% YoY, to $1.5 billion
  • Total on-premise software was up 3% YoY, to $6.3 billion
  • Hardware revenues declined 7% YOY to $940 million and service revenue was up slightly and came in at $856 million.

For Q3 fiscal 2018, ORCL is expected to report adjusted EPS of $0.72, up from $0.69 compared to last year, on revenue of $9.8 billion, according to third-party consensus estimates. Before the tax reform bill had been passed and the final details released, management indicated there could be a sizable impact on the company’s tax charges in fiscal Q3.

Like many of the larger legacy tech companies, ORCL has been in the midst of a multi-year transition to build up its cloud offerings. In recent quarters, management has largely attributed positive results to strength in their cloud division; specifically its software as a service (SaaS) offerings, which have been outpacing growth in its other cloud businesses, platform as a service (PaaS) and infrastructure as a service (IaaS).

Beyond its cloud business, another topic that might come up on the earnings call is recent tax reform. Co-CEO Mark Hurd had been pretty vocal about supporting reforms that would allow the company to repatriate its overseas earnings at a lower tax rate. On last quarter’s earnings call, Co-CEO Safra Catz said that would make about $60 billion available to the company, but they hadn’t made any decisions about how they would use it.

One way ORCL has been using cash is spending billions on buybacks. Between fiscal 2013 and fiscal 2016, ORCL repurchased $8 billion to $11 billion in shares each year. Share repurchases slowed in fiscal 2017, but the board of directors in December 2017 authorized an additional $12 billion to the company’s repurchase program. 

Oracle (ORCL) Stock Chart

ORACLE OVER PAST YEAR.

After the selloff that hit equities in early February, ORCL dropped down to an intraday low of $45.92 on Feb. 9. Since then, the stock has recovered and recently hit a new 52-week high of $53.48 on Mar. 13. The stock has been close to that level before, but hasn’t been able to break out. Shares have since pulled back slightly and have been trading around the mid-$52 level in Friday’s session. Chart source: thinkorswim® from TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results. 

Oracle Trading Activity

ORCL has been prone to larger swings when it has reported over the past several quarters. With its last two quarterly reports, the stock gapped down the day after the results were released.  Despite beating on the top and bottom-line when it last reported, management gave lower-than-expected guidance for fiscal Q3.

Around ORCL’s upcoming earnings release, options traders have priced in an expected share move of 4.8%, according to options data on the thinkorswim® platform. Implied volatility was at the 57th percentile, as of this morning.

In short-term trading at the Mar. 22 weekly expiration, calls have been active at the 53 and 54 strike prices, while puts have been active at the 52 strike.

Looking at the Apr. 20 monthly expiration, most of the activity on the call side has been concentrated at the 52.5 and 55 strikes. At Thursday’s close, open interest was 14,277 and 14,161 contracts at those strikes, respectively.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Good Trading,
JJ
@TDAJJKinahan

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