Oracle Corp. (NYSE:ORCL) reported fourth quarter and fiscal year 2014 results that missed estimates last week, with revenues of $11.32 billion against the consensus estimate of $11.5 billion. Similarly, its quarterly bottom line (Non-GAAP) missed estimates with an EPS of $0.92 against consensus of $0.95. The company reorganized its reporting format, and has begun reporting its cloud subscription and on-premise businesses separately, both on revenues and expenses. We believe this change in reporting structure is extremely helpful in individually analyzing and assessing the company’s performance in both on-premise and cloud businesses.
New software license sales, which include the sale of on-premise versions of Oracle’s database, middleware and application software packages, were flat relative to the prior year period at $9.4 billion in FY14. Total cloud subscription revenues came in at approximately $1.6 billion compared to $1.4 billion last fiscal year. Revenues from license updates and other support services for its software division continued to drive overall revenues higher, growing 6% this fiscal year to reach $18.2 billion. Oracle’s total FY14 software and cloud revenues, which include new licenses plus support and updates, stood 5% higher over FY13, at $29.2 billion.
As has been the case for multiple quarters, Oracle’s hardware division saw a lackluster performance in FY14. Revenues from the sale of new hardware systems declined 2% in FY14, to around $3 billion. However, this decline in sales from new hardware products was offset by an expansion in support revenues. Hardware support revenues increased 4% to $2.4 billion. Combined, Oracle’s hardware division revenues stood at nearly $5.4 billion in FY14, marginally ahead of FY13 revenues.
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In this earnings note, we highlight key takeaways from Oracle’s FY14 results. We are currently revising our $45 Trefis price estimate for Oracle to incorporate the latest fiscal results.
New Cloud Offerings Should Drive Subscription Revenues Higher
Good traction for Oracle’s on-demand solutions continued to drive overall new license and subscription sales higher. As stated above, total cloud subscription sales stood at $1.6 billion in FY14. Oracle’s new reporting format further divides these cloud subscription revenues, namely Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS) and Infrastructure-as-a-Service (IaaS). Revenues from SaaS and PaaS subscriptions stood at $1.1 billion, 23% higher compared to FY13. Revenues from IaaS subscriptions however did not register any growth, at $456 million in FY14 compared to $457 million in FY13.
A majority of the $1.1 billion generated in subscription related revenues from SaaS and PaaS offerings comes from on-demand application software deployments. Oracle’s SaaS portfolio includes various offerings across the Human Resources (HR), Customer Experience (CX), Enterprise Resource Planning (ERP), Enterprise Performance Management (EPM) and Supply Chain Management (SCM) verticals.  With this across-the-board portfolio in SaaS, Oracle is looking to enhance its position in the PaaS and IaaS space. However, as discussed in our pre-earnings note, we expect Oracle’s SaaS growth to lag behind the growth of Salesforce’s and SAP’s SaaS divisions in the near term.
Within PaaS, Oracle currently has database, middleware (Java), business intelligence and mobile platforms to help developers build on-demand applications faster and at a lower cost.  The company expects a full launch of its PaaS offering at the OpenWorld Conference in the fall of 2014.  Following the full launch of Oracle PaaS, we expect the revenue contribution from these offerings to pick up pace going forward.
Oracle expects SaaS and PaaS revenues to grow between 25% and 35% in FY15, while growth in IaaS is expected to range between 10% and 20%.  This guidance is higher than the revenue growth reported this fiscal year, reiterating our view that the new product offerings should be able to drive subscription revenues higher.
Greater Cloud Contribution Should Drive Margins Higher
Operating profit margins for Oracle’s on-premise software license business was approximately 19.6% in FY14. Comparatively, operating profit margins for SaaS and PaaS offerings was much higher, at 59.4%. Similarly, Oracle’s IaaS division had operating profit margins of approximately 32.5%. The higher margin performance from these rapidly expanding cloud verticals should increase Oracle’s overall operating profit margins.Notes: