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Oracle Stock Falls Due to Q1 Earnings, Co-CEO Takes Leave

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Oracle (ORCL) unexpectedly released its earnings results for the first quarter of fiscal 2020 on Wednesday after the market bell.

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Why did Oracle stock fall?

While the company’s earnings were in-line with analysts’ estimates, the sales were lower than the estimates. Along with the first-quarter results, Oracle’s co-CEO Mark Hurd decided to take a leave of absence for health reasons. Oracle stock fell around 5% after the market closed on Wednesday due to the CEO’s leave of absence.

Notably, the company didn’t state how long Hurd will be on leave. The company’s board granted his leave of absence. Oracle will continue to pay all of his employment benefits during his leave. Safra Catz is Oracle’s other CEO. Under their leadership, the company has tried to successfully and rapidly transition to cloud computing software. Hurd will be replaced by Oracle’s founder and CTO Larry Ellison.

Oracle stock has fallen 1.76% in the pre-market trading as of 8:34 AM ET. The stock increased around 1.5% on Wednesday and closed at $56.29. At the closing price, Oracle has a market capitalization of $187.8 billion.

Oracle’s earnings details

Oracle posted an EPS of $0.81 in the first quarter, which was in-line with analysts’ estimates. Notably, the company’s earnings have been upbeat for ten consecutive quarters. However, the adjusted earnings rose 14.1% YoY (year-over-year) due to higher operating income and share repurchases. On a constant currency basis, the adjusted earnings rose 16% YoY in the first quarter. The company had double-digit earnings growth for the third consecutive quarter.

The adjusted operating income rose 2% YoY to $3.8 billion. Oracle’s operating margin was 42% in the first quarter. The company continued to generate a higher margin from its cloud business.

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The company has been rewarding its shareholders through dividends and share buybacks with its strong cash flows. At the end of the first quarter, the company’s cash flow from operations was $13.8 billion, while its free cash flow was $12.2 billion. During the first quarter, the company repurchased shares worth $5 million. Oracle’s board increased the share repurchase authorization by $15 billion.

The company’s board also declared a quarterly cash dividend of $0.24 per share for its shareholders. The dividend will be paid on October 24 to Oracle shareholders as of October 10. The company has an annual dividend of $0.96 and a dividend yield of 1.71% as of Wednesday. Oracle’s dividend payout ratio was 31.3%. Symantec (SYMC), IBM (IBM), and Microsoft (MSFT) also pay dividends regularly. They have yields of 1.21%, 4.51%, and 1.35%, respectively. Recently, Symantec announced a special dividend of $12 per share, which will be issued in the quarter ending in March.

Oracle’s revenues

Oracle’s revenues of $9.22 billion lagged analysts’ expectations of $9.29 billion in the first quarter. According to Reuters, the revenue miss signaled the company’s struggle to gain a presence in the cloud computing market. Currently, Amazon and Microsoft dominate the cloud computing market.

The revenues were marginally higher from $9.19 billion in the same quarter last year. On a constant currency basis, Oracle’s revenues increased 2% YoY in the first quarter. The company claimed that most of the revenue growth came from cloud services and license support.

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Lately, Oracle has been focusing on its cloud computing business to grow its revenues and margins amid more competition. The cloud computing business is picking up the pace. Companies are moving away from the traditional on-premise model to cloud. Oracle’s cloud business offers database management and other services based on business needs.

The company added cloud-based ERP (enterprise resource planning) software maker NetSuite in 2016 to boost its business. Oracle acquired Aconex in 2017 to expand its cloud needs. In the first quarter, the cloud ERP businesses, including Fusion ERP and NetSuite ERP, grew 33% YoY. The company gained significantly from its Fusion and NetSuite cloud applications in fiscal 2019.

Oracle is optimistic about its Autonomous Cloud Services, which should complement the Oracle Autonomous Database. In the first quarter, the company added more than 500 new Autonomous Database cloud customers. Oracle plans to double the Autonomous Database cloud customers in the upcoming quarter.

Second-quarter guidance

After a mixed first quarter, Oracle expects sluggish results in the second quarter fiscal 2020. The company expects an EPS of $0.87–$0.89 in the second quarter. Analysts expect an adjusted EPS of $0.89. Oracle expects the unfavorable currency to dent its profits in the upcoming quarter.

Analysts’ recommendations  

Overall, analysts favor a “hold” rating on Oracle. Among the 35 analysts, eight recommend a “buy,” 23 recommend a “hold,” and four recommend a “sell.” Currently, the analysts have a 12-month target price of $56.47 on the stock. On Wednesday, the stock was trading at a discount of 0.3% to analysts’ 12-month target price. The median target price is $57.00 as of the same date.

Analysts revised their target price on the stock after mixed first-quarter results. While BMO Capital raised the target price to $60 from $59, RBC lowered it from $59 to $57.

Oracle has gained more than the S&P 500 this year. The company has returned around 26.2% YTD (year-to-date). In comparison, the S&P 500 has gained approximately 19.7% during the same period. Microsoft, Symantec, and IBM have gained 35.5%, 31.8%, and 30.8%, respectively.

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