Oracle is trading lower (-4%) after reporting Q1 (Aug) earnings results last night. You're probably familiar with Oracle, but maybe not all the details. Oracle provides products and services that address all aspects of corporate IT environments, including applications, platform and infrastructure. It's 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 also opt to purchase hardware support contracts when they make a hardware purchase.
- Services business (8%): ORCL also offers services to assist customers with maximizing the performance of their Oracle purchases.
Its Oracle Cloud offerings provide a comprehensive stack of applications, platform, compute, storage and networking services in all three primary layers of the cloud: Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Its Oracle Cloud SaaS, PaaS and IaaS offerings (collectively, "Oracle Cloud Services") integrate the software, hardware and services on customers' behalf in IT environments that ORCL deploys, supports and manages for the customer.
Oracle is a leader in the core technologies of cloud IT environments, including database and middleware software as well as enterprise applications, virtualization, clustering, large-scale systems management and related infrastructure. Its cloud license and on-premise license deployment model includes Oracle Applications, Oracle Database and Oracle Fusion Middleware software offerings, among others, which customers deploy using IT infrastructure from the Oracle Cloud or their own cloud-based or on-premise IT environments.
In recent periods, customer demand has increased at a greater rate for cloud-based IT deployment models relative to on-premise IT deployment models. As a result, Oracle has been focusing more resources on developing cloud-based applications, platform and infrastructure technologies resulting in higher growth of its cloud SaaS, PaaS and IaaS revenue as customer preferences have pivoted 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 Q1 (Aug) results, non-GAAP EPS rose 18% YoY to $0.71, which was better than prior guidance of $0.67-0.69. Revenue rose 0.8% year/year to $9.20 bln, which was above prior guidance of $9.00-9.18 bln. Non-GAAP operating margin was flat YoY at 41%. On the call, Oracle guided to Q2 (Nov) non-GAAP EPS of $0.77-0.79, which was in-line with market expectations but the mid-point was slightly below.
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 2% to $7.5 bln. Cloud Services and License Support revenues were $6.6 bln, while Cloud License and On-Premise License revenues were $867 mln.
On the call, Oracle said it has two strategic products that will determine its future: Its Cloud ERP product is the strategic key to its success in the SaaS applications layer of the Cloud. And its Autonomous Cloud Database is the strategic key to success in the IaaS or Infrastructure layer of the Cloud. Oracle is already number one in ERP Cloud market share, with over 20,000 Fusion and NetSuite customers. Customers are buying Fusion ERP to replace their existing SAP on-premise ERP systems, and customers are buying Fusion ERP to replace their existing Workday Cloud ERP systems.
ERP is the largest segment in the application business. Continuing its rapid growth in the Cloud ERP market puts Oracle well on its way to becoming the world's largest SaaS applications company. That's its strategy and current market position in the SaaS layer of the Cloud. In the IaaS, or Infrastructure layer of the Cloud, ORCL has the world's most popular and, technically, most advanced database, the Oracle Autonomous Database. Even its biggest competitors use it to run their businesses.
It's worth noting that ORCL has been aggressively buying back stock. In AugQ, it repurchased 212 mln shares for a total of $10 bln. Over the last 12 months, ORCL has repurchased 440 million shares and reduced the absolute shares outstanding by over 8.5% while growing free cash flow 10%. The board of directors increased the authorization for share repurchases by an additional $12 billion.
In sum, the stock is trading lower today as investors are disappointed in this earnings report and especially the guidance. 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? While it's good to see some large clients moving to the cloud, notably AT&T, the transition is still going to take some time.