Wide-moat Oracle's (ORCL) second-quarter results were mixed, slightly below our top-line estimate but ahead of our EPS expectations. The firm reported flat revenue growth year over year, as its mid-single digit growth in cloud services and license support was offset by currency headwinds, while it reported larger declines in hardware and services revenue versus our prior expectations. Oracle continued to call out impressive growth figures in segments like Fusion ERP (up 44% year over year) and NetSuite ERP (up 25% year over year), but these growth rates have yet to affect top-line growth meaningfully. Although the stock was up 6% in after-hours trading, we are maintaining our fair value estimate of $46 per share. We suspect the stock movement was an overreaction to the EPS beat, which was largely driven by the $10 billion in share repurchases this quarter and does not represent a fundamental change in the business, in our view. With the stock trading in 3-star territory, we would advise investors to wait for a better entry point.
Total revenue was flat year over year at $9.6 billion, including a currency headwind of $140 million. Cloud and on-premise revenue increased 1% year over year to $7.8 billion. Applications revenue was roughly flat sequentially at $2.8 billion and is now over $11 billion in the trailing 12 months, all at a hearty recurring revenue percentage of 91%. Overall ERP and HCM software-as-a-service revenue has reached a run rate of $2.6 billion, growing in the mid-20s year over year and up roughly 4% sequentially. While gross margins were down slightly year over year at 79% due to investment in the cloud infrastructure, management expects them to go higher as the cloud business scales. Operating margins were up 150 basis points year over year due to a decrease in restructuring costs.
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John Barrett does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.