Here 's The Reason Why Oracle "Beat" Earnings In Three Words

After the close, Oracle reported Q2 results for the quarter ended Nov 30 which just barely beat consensus estimates, reporting sales of $9.562BN vs expectations of $9.53BN, down from $9.589BN a year ago, and EPS of $0.80 vs consensus of $0.78.

So far so good, and superficially these results were enough to boost the stock to $48 or 5% higher, after hours.

However, a more detailed look below the surface revealed that not all is as well as the headline scanning algos would like to believe.

For one thing, the only reason the company beat EPS forecasts of $0.78 is because of Oracle's massive buybacks, as the company bought back another $10 billion of its stock in the second quarter, following a repurchase of $10 billion in Q1. As a result, ORCL's diluted shares outstanding decline by 466 million from 4.283 billion to 3.817 billion. Had ORCL not repurchase roughly 210MM in shares in the current quarter, its EPS would have been a 2 cent miss of 76 cents.

There's more.

Not only did Oracle benefit from the generosity of its creditors, as the company's net debt rose to $9 billion at the end of Q2 vs a net cash position of $7 billion at the start of the fiscal year, and used the proceeds to repurchase $20 billion in stock in the first two quarters, but Oracle's income tax provision also tumbled, from 21.7% in Q2 2017 to just 15.9% in the current quarter. As a result even though the company's pre-tax income declined 2% to $2.774 billion, its after-tax net income actually rose by 5% to $2.333 billion.

And a little more.

Looking at the company's diluted GAAP EPS reveals a far more modest number of just $0.61. And yet, the non-GAAP EPS number is materially higher, or $0.80. Why? Because as a result of constant, recurring "one-time, non-recurring" charges, including a $143MM restructuring addback, $424MM in amortization of intangibles, and $303MM in added back stock-based comp (and various other items), the company's pre-tax net income rose from $3.1BN GAAP to $4.1BN non-GAAP, boosting the company's operating margin from 32% to 43%. Finally apply a 18.6% non-GAAP tax rate (much lower than the 25.2% a year earlier), and one gets a net income number of $3.061BN, almost unchanged from the $2.96BN a year ago, but as a result of the 466MM share drop, the non-GAAP EPS jumped from $0.69 to $0.80.

And that's how - between buybacks, non-GAAP adjustments, and a lower tax rate - Oracle's unchanged revenue and declining GAAP net income resulted in a 19% increase in non-GAAP EPS.

What about the company's business lines?

Here finally, there was some undoctored good news, with revenue from cloud services and licence support, the company’s largest segment, growing 3%, to $6.64 billion from $6.46 billion (although note that Oracle stopped reporting its cloud revenue separately earlier this year, despite the close attention the figure had received as an indicator of the company’s attempted transformation).

That was all the good news; the bad news is that all the company's other revenue lines: Cloud license and on-premise license, Hardware, and Services all posted declines of -9%, -5% and -5% respectively.

Finally, since Oracle realized that betting the house on just this aggregated cloud number may be risky, it also disclosed that total revenue in constant currency terms would have grown 2%. What was it as reported? Down $27 million to $9.562 billion.

In any case, for now at least, the company's triple-play bezzle of fudging GAAP numbers, tax rates and, of course, buying bank $10BN in stock, was enough to fool the algos if only in the after hours, sending Oracle's stock price 5% higher. Once humans have had time to pore through the numbers, we don't expect this upside "beat" to persist.