Oracle (ORCL 45.99, +0.26, +0.56%) opened nicely higher today (+5%) after reporting Q2 (Nov) earnings results last night. Oracle provides products and services that address all aspects of corporate IT environments, including applications, platform, and infrastructure. It is primarily a provider of enterprise software but also provides hardware and services. Oracle has three businesses:
- Cloud and license business (82% of FY18 revenue): This includes its Oracle Cloud Services offerings, cloud license and on-premise license offerings, and license support offerings.
- Hardware business (10%): This includes its hardware products and related hardware support services offerings. Hardware products include Oracle Engineered Systems, servers, storage, and industry-specific products. Customers typically opt to also purchase hardware support contracts when they make a hardware purchase.
- Services business (8%): ORCL offers services to assist customers with maximizing the performance of their Oracle purchases.
Oracle has been channeling resources into developing its
cloud-based applications, platform ,and infrastructure technologies, resulting
in higher growth of its cloud SaaS, PaaS, and IaaS revenue as customer
preferences pivot to the Oracle Cloud for new deployments and as customers
migrate to and expand with the Oracle Cloud for their existing on-premise
workloads. ORCL expect these trends to continue.
Turning to the Q2 (Nov) results, non-GAAP EPS rose 16% year/year to $0.80, which was better than prior guidance of $0.77-0.79. Non-GAAP revenue was roughly flat year/year at $9.57 bln, which was at high end of prior guidance of -2% to flat. Non-GAAP operating margin was flat year/year at 43%. On the call, Oracle guided for Q3 (Feb) non-GAAP EPS of $0.83-0.85, which was in-line with market expectations.
Oracle's cloud business is closely followed by investors. Total Cloud Services and License Support plus Cloud License and On-Premise License revenues were up 1% to $7.9 bln. Cloud Services and License Support revenues were $6.6 bln, while Cloud License and On-Premise License revenues were $1.2 bln.
On the call, Oracle said that its Cloud Apps had a spectacular quarter. Overall, Oracle’s Enterprise Resource Planning (ERP) and Human Capital Management (HCM) solutions now have annualized SaaS revenue of $2.6 bln, representing growth in the mid-20% range. Revenue growth for the company’s Fusion Applications suite was 34% while revenue growth for Fusion ERP was 44% organically. Furthermore, revenue grew by 25% for NetSuite ERP While Vertical Revenue and Applications grew by 35%. In terms of SaaS bookings, the booking growth rate for ERP and HCM has reportedly accelerated through the last four quarters and is now in the high-30s. ORCL also noted its largest movement yet -- of roughly 200 customers -- of Install Base customers to ERP Cloud during the quarter. That growth is reflected in bookings metrics, though not yet in revenue remarks.
SaaS net bookings, which factor in non-renewals, were the highest ever in the company's history for a non-Q4 and were up in the high-30% range. Key customer additions for the quarter include MGM Resorts, Johnson Controls, and a certain large distribution company whose name cannot be disclosed but whom Oracle is furnishing with a complete suite, in what the company’s CEO described as “a very large win.” This is becoming a theme. When ORCL wins an ERP client, it now increasingly connects HCM bookings to that win, providing clients with a unified user interface and workflow process.
In sum, Oracle seems to be more positive on its cloud offering performance than it was a year ago. The company sees an enormous opportunity ahead in ERP as well as HCM. The bigger picture concern with Oracle is that it has been late to the game in terms of cloud computing. On-premise enterprise systems had been its bread-and-butter for years, and the company has been criticized for being slow to make the switch. ORCL has been trying to catch up with companies like Amazon (AMZN) and Microsoft (MSFT). The concern is that many customers are already happy with their current cloud computing platforms, so why switch to ORCL now?
As such, expectations have been pretty low, including in NovQ. However, our impression is that Oracle seems more bullish now on its cloud offering than it has been in recent quarters. The strength of its bookings growth along with climbing renewal rates gives confidence that its Cloud Apps business is only going to strengthen from here. ORCL says this is perhaps the best Apps quarter it has had in terms of bookings, breadth of bookings across its portfolio, and the visibility that provides into the revenue backlog.
Finally, it's worth noting that ORCL has been aggressively buying back stock. In NovQ, it repurchased 203 mln shares for a total of $10 bln. Over the last 12 months, ORCL has repurchased 602 mln shares and reduced its absolute shares outstanding by over 12%. That tells us that management feels that its stock is cheap, and it helps to support the stock price.