Oracle is trading sharply lower today (-6%) after reporting Q2 (Nov) results last night that are being viewed as a disappointment in terms of growth for its cloud business.
You're probably familiar with Oracle, but some background would help. ORCL is primarily is 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 or hybrid.
Its Oracle Cloud offerings provide a stack of application, 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 on-premise IT offerings include: Oracle Applications, Oracle Database and Oracle Fusion Middleware software, among others; hardware products including Oracle Engineered Systems, servers, storage and industry-specific products, among others; and related support and services.
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.
Oracle has three business segments:
- Cloud and on-premise software (80% of FY17 revenue): This includes its cloud SaaS, PaaS and IaaS offerings, on-premise new software licenses offerings, and software license updates and product support offerings;
- Hardware (11% of FY17 revenue): This includes its on-premise hardware products and related hardware support services;
- Services (9% of FY17 revenue).
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. Oracle's SaaS offerings include a broad suite of software applications that span core business functions including human capital management (HCM), enterprise resource planning (ERP), customer experience (CX), and supply chain management (SCM), among others. The company also offers a number of cloud-based industry platforms to address specific customer needs within certain industries. Of note, in November 2016, Oracle made a major acquisition when it bought NetSuite for $9.3 bln in cash.
Turning to the Q2 (Nov) results, non-GAAP EPS rose 14% YoY to $0.70, which was better than prior guidance of $0.64-0.68. Revenue rose 6.2% year/year to $9.63 bln, which was also better than expected. Overall cloud revenue growth came in at +44%. Its Fusion ERP and Fusion HCM SaaS applications suite revenue grew 65% in the quarter. In addition to earnings, the Board of Directors has also increased its share buyback authorization by $12 bln.
ORCL says it's now the clear market leader in enterprise back-office SaaS applications with over 5,000 Fusion customers. And it expects to extend its lead by selling around $2 bln in new enterprise SaaS application cloud subscriptions over the coming four quarters. That's more new SaaS sales than any of its competitors.
Oracle also expects to soon deliver the world's first autonomous "self-driving" database. The new artificially intelligent Oracle database is fully automated and requires no human labor for administration. If a security vulnerability is detected, the database immediately patches itself while running. ORCL says no other system can do anything like this. Best of all, the company guarantees the price of running the Oracle Autonomous Database in the Oracle Cloud is less than half the cost of running a database in the Amazon Cloud.
So if they reported a nice beat, why is the stock down? The problem seems to be the guidance on the call. For Q3 (Feb), the company expects revenue (Non-GAAP, Constant Currency) in the range of +2-4% (Approx +5-7% with FX). Non-GAAP EPS is expected at $0.68-0.70. Both results were below market expectations. Also, some analysts seem to have some concerns regarding Oracle's long term cloud revenue growth potential.
In sum, the stock is trading lower today as investors are disappointed in this earnings report and 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 happy with their cloud computing platform, so why switch to ORCL now? ORCL's cloud growth in NovQ is being seen as a disappointment. Perhaps they can improve in the coming quarters.