Oracle (ORCL 52.06, -0.99, -1.87%) is trading lower today after reporting Q2 (Nov) earnings
results last night. Non-GAAP EPS rose 7% yr/yr to $0.87, which was better than
prior guidance of $0.83-0.85. Non-GAAP revenue declined slightly (-1%) yr/yr at
$9.62 bln, which was slightly better than expected. Non-GAAP operating margin
was flat yr/yr at 43%. On the call, Oracle guided to Q4 (May) non-GAAP EPS of
$1.05-1.09, the mid-point of which is above 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 flat yr/yr at $7.9 bln. Cloud Services and License Support revenues were $6.7 bln, while Cloud License and On-Premise License revenues were $1.3 bln.
In terms of product categories, ERP grew in the mid-30s and the verticals grew in the high-30s. Its software business, which is the totaling of Cloud Services and License Support revenue with Cloud License and OnPremise License revenue, is 82% of total revenue and it grew 3% in constant currency.
ORCL says its software business has remained extremely stable and resilient as the company has made the transition to faster growing cloud business that has entailed trading non-recurring upfront license revenue for recurring long-term subscription revenue. As a percentage of its total software business, cloud is now more than double what it was just three years ago and provides ORCL with the ability to accelerate overall software revenue growth as this mix shift continues.
On the call, Oracle said that its future rests on two strategic businesses: Cloud Applications and Cloud Infrastructure. The growth in Cloud Applications has been driven by its Fusion Suite and NetSuite. Both are growing very rapidly. Both Fusion and NetSuite are integrated suites of applications, including sales, service, HR, financials, supply chain and manufacturing applications. No other cloud services provider has such a comprehensive suite of applications covering both the front office and the back office.
Most customers want their cloud services provider to make their applications work together. Customers do not like to be responsible for the complex process of integrating lots of different applications, running on lots of different vendors' clouds. As such, ORCL says its integrated suite approach to the Cloud Applications business is a primary reason for the very rapid growth in its Cloud Applications market share. The introduction of the Gen2 highly secure infrastructure, featuring the Oracle Autonomous Database has been very well received.
This was a decent but not great quarter. Oracle seems to be quite a bit more positive on its cloud offering performance than it was a year ago. The bigger picture concern with Oracle is that they have been late to the game in terms of cloud computing. On-premise enterprise systems had been its bread-and-butter for years and they have 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 cloud computing platform, so why switch to ORCL now?
After trading lower during the tech sell-off in 4Q18, the stock has bounced back nicely, up around +23% since late December. It traded above where it was before the tech sell-off. That tells us investors had fairly high expectations heading into this FebQ report and the results were just ok. On a final note, ORCL increased its quarterly dividend by 26% to $0.24 per share, which computes to a 1.9% annual yield.
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