Forget the Analysts -- Oracle's Right on Track


You have to love it when a plan comes together. Oracle's (NAS: ORCL) transition from the ultimate hardware supplier to a cloud provider is hardly complete. But, as discussed in an article several months ago, Oracle CEO Larry Ellison (finally) got on board the future of the IT industry -- cloud computing -- and it's starting to pay off.

If you only read the headlines, you'd think Oracle's recent quarterly results were a disappointment. Hardware sales were down, Oracle missed analyst estimates, and all the usual jazz. But as it happens, the analysts spewing that noise got it all wrong: Oracle nailed its fiscal Q1 results and did it in more ways than one.

Why analysts are grumbling
On the downside, Oracle revenues dipped versus fiscal Q1 of 2011, dropping to $8.18 billion from last year's $8.37 billion. The culprit -- and this is the good news, as odd as that sounds -- was the 24% decline in hardware sales. And the hardware unit's "disappointing" results came after Oracle's fiscal Q4 drop of 16% in the same area.

Though Oracle's adjusted earnings of $0.53 a share are right in line with expectations, the revenues that generated that profit is below the $8.41 billion the pundits had forecasted. The 7% drop in operating expenses -- and that includes a one-time restructuring charge of $145 million -- was the catalyst for the 11% increase in earnings year over year. If you're an operating income aficionado, Oracle delivered there, too, up 7% over Q1 of 2011.

Apparently, managing expenses in a tough economic marketplace is a bad thing -- at least that's what many of the analysts suggest. As an analyst from UBS put it, Oracle had "a weak start to the year." Citigroup was even more overt, stating that Oracle's hardware results were "atrocious."

But it's good, really
So how are a drop in revenues, and poor results in hardware sales, once Oracle's claim to fame, good news? First, a quick trip down memory lane. Longtime Oracle watchers will recall a few years back when Ellison stated, for the record, his opinion on cloud computing: "The computer industry is the only industry that is more fashion-driven than women's fashion."

What do Ellison's comments on the cloud have to do with Oracle's fiscal Q1 results? To his credit, Ellison's been doing more than sailing and buying Hawaiian islands. The flamboyant owner recognizes Oracle needs to be a major player in cloud computing, and his commitment to providing cutting-edge cloud services is working.

Software revenues, which include licenses and cloud subscriptions, jumped to 70% of Oracle's total revenues. Cloud service revenues alone increased 5% -- 10% if you take unfavorable exchange rates into account. Continually gaining market share in what Forrester Research predicts will be a $241 billion industry by 2020 should have Oracle shareholders salivating.

As always, Oracle's balance sheet remains strong. With more than $31.5 billion in ready cash and the aforementioned operating cash flow adding to the pile, Oracle could bump up the rather paltry 0.74% dividend yield, if it had a mind to. It's one area Oracle is lacking in compared with competitors Microsoft (NAS: MSFT) , Intel (NAS: INTC) , and CA (NAS: CA) .

Fundamentalist investors will note that Oracle appears a bit more expensive than others in the industry. At 16 times earnings and a price-to-sales ratio over 4, Oracle is priced steeper than Microsoft, Intel and CA. But that's more a function of having the industry as a whole trading below reasonable values, and less to do with whether Oracle is expensive.

Even accounting for the nearly 18% jump in Oracle's share price since mid-June, it remains a sound buy and a great addition to most any portfolio. The transition to the cloud is working, and so is Oracle. As for fiscal Q1's "poor performance"? The analysts got this one all wrong.

As good an investment as Oracle is, Intel should be mentioned in the same breath. Woefully undervalued, Intel's sound dividend and growth opportunities are worthy of investigation. To get you started, take a look at the Fool's premium report for detailed insight into the risks and potential for gain Intel offers.

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