Oracle’s Q3 and Outlook Fall Short of Our Expectations

Oracle’s ORCL third quarter was marked by some bright spots--like in Oracle's Fusion cloud ERP and HCM offering--but ultimately came in as a disappointment. Oracle missed our top and bottom line expectations, with gross profit significantly contributing to the discrepancy. Coupled with results was the outlook for the upcoming fourth quarter, which was also underwhelming. Outlook assumed Cerner would be acquired after the upcoming fourth quarter. In our model, we assume the deal will close at the beginning of Oracle's fiscal 2023 and we continue to believe that the deal leaves much to be desired, with little synergies in sight. All considered, we are maintaining our fair value estimate for the narrow-moat stock at $63 per share. This leaves Oracle overvalued with shares trading at $76 in after hours.

Revenue in the third quarter increased 4% year over year to $10.5 billion, as cloud services and license support sales continued to drive results, reaching $7.6 billion in the quarter, representing a 5% increase year over year. Within the largest segment, Oracle reported much health seen in its strategic back-office applications as well as Fusion ERP, Fusion HCM, and Netsuite ERP. Oracle’s cloud license and on-premise license revue growth was mild at 1% year over year, leading to $1.3 billion in revenue. On profitability, adjusted operating margins for the quarter expanded by 100 basis points year over year to 46% and non-GAAP earnings per share were $1.13.

Outlook for the fourth quarter includes revenue growth of 4% and adjusted earnings per share of $1.42, both at the midpoint. Guidance assumes that Oracle's acquisition of Cerner happens after Oracle's fourth quarter.

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