Oracle Q4FY14 Preview: New License Sales To Be Weighed Down By Weak On-Premise Application Sales

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Software developer Oracle (NYSE:ORCL) is scheduled to report its fourth quarter and full fiscal year 2014 results Thursday, June 19. In the nine months in FY14, Oracle reported revenues of approximately $27 billion compared to $26.2 billion from a similar period in FY13. Revenues from software updates and support services continued to show promise in a weak IT environment, growing 6% to $13.5 billion. However, growth from new software licenses and cloud subscription continued to decelerate, growing 2.4% to reach $6.5 billion in the nine months in FY14.

Oracle’s hardware business has rebounded to positive growth in Q3FY14 after many quarters of year-to-year declines. Revenues from both hardware products and hardware support increased 6.6% on a year-on-year basis to $1.3 billion in Q3FY14. For the nine months in FY14, Oracle’s hardware division reported flat sales at $3.9 billion on a year-on-year basis. Oracle’s hardware business has witnessed an extreme deterioration in financials since the acquisition of Sun Microsystems in January 2010, with annual revenues declining from $4.2 billion in CY2011 to $2.9 billion in CY2013.

Oracle expects Q4FY14 revenues to grow between 3% and 7% on both GAAP and non-GAAP basis. Earnings per share on a non-GAAP basis, which exclude non-cash expenses such as depreciation and stock compensations, is expected to range between 92 cents/share and 99 cents/share this quarter.

In this pre-earnings note, we highlight key trends that are expected to shape Oracle’s business going forward. We currently have a $45 Trefis price estimate for Oracle, which stands at a 7% premium to its current market price.

See our complete analysis of Oracle here

Database Leadership To Continue

Oracle derives a majority of software license revenues from the sale of licenses for its flagship database management software products. According to our calculations, Oracle derived $5.13 billion and $8.41 billion in revenues from new licenses and support services for its database products alone in CY2013. These revenue numbers translate into 49% of new license revenues and 47% of license support revenues for CY2013, indicating the importance of DBMS systems for Oracle’s performance. Oracle is the market leader in the relational database market, with a 48% market share.

In the overall database market, we estimate Oracle’s market share at 45.4% in 2013. We believe there is limited competition for Oracle’s DBMS systems in the market. Additionally, the company has innovated constantly and rolled out new technologies such as multi-tenancy and pluggable databases in its latest 12c database and has explored options outside the relational DBMS domain with NoSQL databases. Consistent product launches should help Oracle retain its market leadership going forward.

Cloud Growth To Lag Behind Salesforce and SAP

During the nine months so far in FY14, growth in new software license and cloud subscriptions was primarily driven by good traction in Oracle’s cloud subscriptions. Cloud subscription revenues grew 22.5% during the period to $800 million. On the other hand, new software license sales for various database, middleware and application software products increased by a meager $5 million to $5.65 billion during the same period. As stated above, the database division continues to remain one of the strongest performers for Oracle.

Oracle’s strength in on-premise database sales was offset by weakness in on-premise application software products, caused by increasing adoption of Software-as-a-Service (SaaS) versions of these applications. Despite its strength in on-premise databases, reducing demand for on-premise software applications has weighed on overall new license sales. The growing demand for SaaS offerings has forced Oracle to focus on increasing its cloud footprint. Going forward, the share of on-premise in overall application sales is expected to decline further, with cloud subscription sales expanding at double digit pace.

However, this growth in cloud subscriptions is expected to lag behind Salesforce and SAP. Salesforce is the leader in the CRM market while SAP has market leadership positions in most enterprise software verticals such as ERP, HCM, BI/BW and SCM. Last quarter (Q1CY14), Salesforce reported a 37.5% increase in revenues while SAP registered a 38% non-IFRS increase in cloud subscription sales. During a similar period (Q3FY14), Oracle’s cloud revenues increased at a slower, though still rapid, rae of 24%. We believe it would be difficult for Oracle to have the same amount of traction as Salesforce and SAP in terms of cloud revenue growth, given their market leadership positions in individual enterprise software verticals.

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  • commented 6 months ago
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