Oracle Q2’15 Earnings Preview: All Eyes on Cloud

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The world’s leading database software provider, Oracle Corp. (NYSE:ORCL) is scheduled to report its Q2 2015 results on December 17th. Consensus revenue estimates stand at $9.52 billion for the quarter, implying a 2.5% year-over-year growth, while the company guides revenue growth for the quarter to be from 0% to 4% for the quarter. Consensus EPS estimates are placed at $0.68, in line with the company’s guidance of $0.66 to $0.70.

The software industry is currently transitioning from on-premise systems to cloud-based systems and Oracle, as the world’s second largest software company, is a central player in this change. The company’s cloud-based software, platform and infrastructure products have demonstrated encouraging growth rates and are expected to continue to accelerate as more and more customers migrate to cloud. The company is simultaneously expanding its product line and introduced a cloud-based database in September.

Oracle’s performance on the hardware front has recently suffered and is under further pressure from declining demand for its Unix servers. However, the company is countering this decline by transitioning from stand-alone servers to integrated platforms, which is a nearly $8 billion market growing at rates as high as 68%; it thus has strong long-term potential.

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Below we provide a brief overview of the company’s performance in the year so far and the near-term outlook. We currently have a price estimate of about $48 for Oracle, which is 20% higher than the current market price.

Check out our complete analysis for Oracle

Q1 2015 Recap

Last quarter the company fell short of consensus estimates for both  revenue and EPS . Revenue stood at $8.6 billion representing year-over-year growth of 3%; this was lower than both its quarterly guidance of 4%-6% and the consensus revenue estimate of $8.8 billion. Revenue was dragged down due to the migration of customers from on-premise systems to the cloud, due to which sales of new software licenses suffered. Declining demand for Unix servers resulted in poor hardware sales, putting further pressure on Oracle’s hardware business.

First quarter EPS stood at $0.62, which was at the lower end of the company’s guidance of $0.62 to $0.66 and below the consensus estimate of $0.64. The lower EPS was on account of higher effective tax rate, which was up by 2% year over year.

Cloud Leads the Way

Oracle’s cloud offerings currently form its fastest growing revenue stream. In Q1 2014, the company’s total cloud sales grew by 31% year over year to reach $475 million, of which Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) contributed $337 million (up 32% year over year). Infrastructure-as-a-Service made up the remaining $138 million, witnessing a 25% growth rate. The company also released its new Database-as-a-Service (DaaS) in September, further augmenting its cloud-based offerings. On the other hand, new software license sales were down by 2% year over year, although software updates and support expanded by 6% to reach a record $4.7 billion, in Q1 2014.

This indicates an encouraging trend of customers moving away from on-premise systems to the cloud. This migration is expected to result in accelerating revenues from high-value cloud subscriptions, although revenues from new software licenses and support services may suffer in the short term.

The company expects to maintain strong growth in its cloud business, with SaaS and PaaS sales expected to grow anywhere between 38% to 43% in the second quarter. IaaS is expected to grow by 39% to 43%, while total software and cloud revenue, including new licenses and support, is expected to expand by 3% to 6%.

‘Engineered Systems’ the Only Bright Spot in Hardware

Oracle’s hardware unit continues to play second fiddle to the fast-growing cloud business and fell by 8% in the first quarter. At about 14% of the company’s total revenues, the hardware business unit may not be big enough to have a significant impact on the overall performance, but the company cannot afford revenue deceleration in any of its divisions amidst cutthroat competition.  Revenues from hardware product sales and hardware system support, the unit’s two sub-segments, declined by 14% and 2% respectively in the first quarter. This trend is expected to continue in the near future and the company does not expect to break into positive territory in the second quarter.

However, engineered systems are emerging as a promising hardware product category and grew by double digits in the first quarter. Oracle is the market leader in engineered systems and this segment now accounts for over a third of hardware products sales. This high-value, high-margin product category may well make up for Oracle’s disappointing server sales, a market in which it recently lost its fourth spot to Cisco (NYSE: CSCO). (Read: Oracle Loses 4th Spot in Global Server Market to Cisco)

 

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