$ORCL Fiscal Q3 Earnings Preview

by Dan March 14, 2016 11:54 am • Commentary

Event: Oracle (ORCL) reports fiscal Q3 results tomorrow after the close. The options market is implying about a 4.5% one day move, which is slightly high of its 4 quarter average of about 4.25%, but in line with the 10 year average.  The March 18th weekly 38.50 straddle (call premium + put premium) is offered at about $1.90 (stock ref $38.60) if you bought that, and thus the implied move, you would need the stock above $$40.40, or below $36.60 to make money.  

Price Action / Technicals: The stock is up 6% year to date, outperforming large cap software peers MSFT (down 5% in 2016) and ADBE (down 7.5% in 2016), which is in contrast to ORCL’s massive under-performance to these two in 2015, down 19% vs MSFT up 20% and ADBE up 29% in 2015.

ORCL is up about 17% since making two year lows a month ago, and above its 200 day moving average for the first time since last June, and has recently broken above the 9 month downtrend:

[caption id="attachment_62153" align="aligncenter" width="600"]ORCL 1yr chart from Bloomberg ORCL 1yr chart from Bloomberg[/caption]

Taking a slightly longer term view, there seems to be a bit of a head and shoulders top forming with $35.50 as the neckline. The uptrend that has been in place since mid 2012 (and broken last year) should serve as important near term resistance up near $40:

[caption id="attachment_62154" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

Options Volatility Snapshot: short dated options prices remain elevated, with 30 day at the money implied vol at nearly 27%, above the 1 year average of about 23.5%:

[caption id="attachment_62157" align="aligncenter" width="600"]ORCL one year chart of 30 day at the money Implied volatility from Bloomberg ORCL one year chart of 30 day at the money Implied volatility from Bloomberg[/caption]

Options prices into the event appear fair to possibly cheap, with the implied move nearly inline with the 10 year average one day move.

With the stock’s decline over the last 9 months, options open interest has been declining, with options volumes until this last month fairly anemic relative to the last year, per Bloomberg:


Fundamentals: When the company reported their Q2 in mid December, the results were essentially in-line, but operating margins came in below expectations by 100 basis points, and the company guided Cloud SaaS and PaaS for the current quarter slightly below expectations, sending the stock down 5% the next day. Some analysts suggest that the comparisons should become easier in their fiscal Q4 as transitional promotions to Cloud based software and platform as a service offerings trail off and bookings accelerate.

ORCL trades about 15x fiscal 2016 earnings which declined for the second straight year, and trades about 13.5x expected fiscal 2017 earnings that consensus is calling for 9% growth on 3% sales growth.  ORCL pays a dividend with a yield of 1.55%, has a multi-billion share buyback and has been a serial acquirer for any growth.

ORCL is a roll up for all intents and purposes, dating back to their $10 billion purchase of PeopleSoft in 2005, the company has made a bunch of smaller, but still very large purchases (Siebel for $6 billion in 2006, Hyperion for $3.3 billion in 2007, BEA Systems for $8.5 billion in 2008, Sun Micro for $7.4 billion in 2010, RightNow for $1.5 billion in 2011, Taleo for $1.9 billion in 2012, Acme Packet for $2.1 billion in 2013, and Micros for $5.3 billion in 2014 and DataLogix for $1.2 billion in 2015). You get the point, any and all sales growth in the last decade has come from acquisitions.

So Who’s Next?

With nearly a third of their $163 billion market cap in cash (6% net of their $42 billion in debt) the company could make a large trans-formative deal, but their debt load has more than doubled since 2013 and investors could soon become worried about leverage ratios if future deals are expensive and don’t deliver. CRM is probably way too big at nearly $48 billion and there is history between the two CEOs, but maybe Service Now (NOW) or Workday (WDAY) both with an expected $1.5ish billion in sales this year, with expected sales growth of about 33%, and market caps of $10 and $13 billion respectively, are more likely targets.

My Take Into the Print: Expectations are not high for the quarter given the lowered guidance in December and the fact that the stock remains 17% below its 52 week highs made last spring.  On the upside, $40 looks like a fairly important resistance level, as highlighted above, while $36 on the downside decent support, which essentially straddles the implied move:

[caption id="attachment_62156" align="aligncenter" width="600"]From Bloomberg From Bloomberg[/caption]

We will detail some trade ideas tomorrow prior to earnings.