Oracle (ORCL 42.88, -3.39, -7.32%) opened lower today (-6%) after reporting Q4 (May)
earnings results. You're probably familiar with Oracle and its registered
trademarks Oracle and Java, but maybe only passingly. The company is primarily a
provider of enterprise software but also provides hardware and services that
address all aspects of corporate IT environments: applications, platform, and
infrastructure. Its products are delivered to over 400,000 worldwide customers
through a variety of IT deployment models, including on-premise, cloud-based, and
Its Oracle Cloud offerings provide a stack of application, platform, compute, storage and networking services in the three primary layers of the cloud: Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Its on-premise IT offerings include Oracle Applications, Oracle Database, and Oracle Fusion Middleware software, among others; hardware products such as Oracle Engineered Systems, servers, storage, and industry-specific products, among others; and related support and services.
Within the last year, ORCL has noted that customer demand has increased at a greater rate for cloud-based IT deployment models relative to demand for on-premise IT deployment models. As a result, Oracle turned to focusing more resources on developing cloud-based applications, platform, and infrastructure technologies, which resulted in higher growth of its cloud SaaS, PaaS, and IaaS revenue as customer preferences pivoted toward the Oracle Cloud for new deployments and as customers migrated to and expanded with the Oracle Cloud to suit their existing on-premise workloads. As of the end of Q3 (Feb), ORCL reported an expectation that these trends will continue.
Turning to the Q4 (May) results, non-GAAP EPS rose 11% year/year to $0.99, which was better than prior guidance of $0.95-0.98. Revenue rose 2.9% year/year to $11.25 bln, which was below prior guidance of $11.38-11.60 bln. ORCL notes that these revenues were $200 mln above its constant currency forecast. Non-GAAP operating margin improved a bit to 47% from 46% in the prior year period. On the call, Oracle guided to Q1 (Aug) non-GAAP EPS of $0.67-0.69 and revenue of $9.00-9.18 bln (including FX impact). This guidance was slightly below market expectations.
Oracle's cloud business is closely followed by investors. Cloud License and On-Premise License revenue were down 5% to $2.5 bln. Total Cloud Services and License Support revenue was $6.8 bln, up 5% in constant currency, 7% in US dollars. Under its prior reporting structure, in Q4, what ORCL previously called total Cloud Revenue was $1.7 bln. The company’s surprise change in reporting structure, which newly folds cloud revenue into a larger reporting category, thus providing less insight than usual into growth particular to the cloud business, has given many analysts pause.
ORCL says that some of its largest customers have now begun the process of moving their on-premise Oracle databases to the Oracle Cloud. For example, AT&T is moving thousands of databases and tens of thousands of terabytes of data into the Oracle Cloud. Oracle thinks that these large-scale migrations of Oracle database to the cloud will drive its PaaS and IaaS businesses throughout FY19.
Looking ahead, Oracle says it's focused on two principal financial measures. First, ORCL expects its overall revenue growth rate to accelerate because its growing cloud revenue is becoming a larger and larger percentage of total revenue. While any one quarter's results may vary, ORCL expects to increase its revenue growth rate this year and beyond. Second, ORCL expects that it will once again deliver double-digit EPS growth for the year.
In sum, the stock is trading lower today as investors are disappointed in this earnings report and especially the guidance. A 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.
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