Oracle Q1’15 Preview: Key Trends We Expect

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The world’s largest database software vendor, Oracle Corp. (NYSE:ORCL), is scheduled to release its fiscal Q1’15 results on September 18, after markets close. (Fiscal years end with May.)  Last quarter (Q4’14), Oracle missed estimates on its sales as well as earnings. Revenues stood at $11.3 billion against the consensus estimate of $11.5 billion while its quarterly bottom line (Non-GAAP EPS) stood at $0.92 against consensus of $0.95.

For the current quarter, Oracle guides revenues to grow between 4% and 6% year to year. Consensus analyst estimates for Q1’15 revenues stand at $8.77 billion, indicating a 4.7% year-on-year growth rate. Oracle’s bottom line (Non-GAAP EPS) guidance for the quarter ranges between $0.62-$0.66, against a consensus EPS estimate of $0.64.

Below, we provide a brief update on Oracle’s FY14 performance and take a look at key trends for Q1’15.

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FY14 Review:

Last fiscal year, Oracle reorganized its reporting format, and has begun reporting its cloud subscription and on-premise businesses separately, both on revenues and expenses. Revenues from Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) grew 24% in constant currency terms, crossing $1 billion in FY14. However, Infrastructure-as-a-Service (IaaS) sales flat-lined throughout FY14, at $456 million. Total cloud revenues stood at approximately $1.6 billion, increasing about 15.4% over FY13. We expect a similar performance in cloud from Oracle in Q1’15.

On the on-premise front, new licenses revenues continued to drag down overall software sales over the full fiscal year period. However, the cyclical nature of new license sales results in greater license sales towards fiscal end for Oracle. Last fiscal year, new license sales as percent of total quarterly revenues increased from 20% to 33% through the Q1’14 – Q4’14 period. Given the relatively smaller base in Q1, sales growth is likely to he higher compared to other quarters. Over the course of an entire fiscal year, this cyclicality in new license sales is averaged out and hence, macro factors that influence demand for new on-premise licenses have more meaningful impact. Software license updates and product support sales continued to mask the overall weakness in new license sales, growing 7% in FY14 to reach $18.2 billion.

Oracle’s hardware business displayed first signs of positive growth last fiscal year, driven by growing demand for its high-performance Engineered Systems. New hardware product revenues stood at $2.98 billion, 1% lower than revenues from full FY13. However, this decline in new product sales was much better than comparable figures from FY13 and FY12, where sales slumped 19% and 14% respectively. Bookings from Oracle’s SPARC super cluster platform clocked a triple digit growth rate in Q4’14 while other systems such as Exalytics, Big Data Appliance and Oracle Database Appliance all grew double-digits. Oracle reports to ship its 10,000th Engineered System in Q1’15. [1]

Key Trends for Q1’15:

1. New License Sales to Trend Lower

New license sales have been on a downward trend for quite sometime, particularly due to gaining interest in on-demand software adoption. This trend is likely to eat into new license sales for large cap software vendors such as Oracle, SAP, Microsoft and IBM going forward. In a recent statement, SAP Chief Financial Officer Luka Mucic stated that he expects on-demand subscription sales from SAP to outgrow on-premise license sales by 2020. [2] At FY13 end, SAP had new software sales of €4.7 billion against cloud subscription revenues of €800 million. This highlights the strength of the ongoing cloud migration across the IT industry.

2. Oracle’s Cloud Subscription Sales To Lag Salesforce and SAP

As noted above, Oracle’s cloud subscription sales in FY14 grew 15.4% on a year-on-year basis. Comparatively, Salesforce and SAP have reported cloud subscription sales growth of over 30%. Oracle’s overall SaaS sales growth was dragged down by weak performance from its IaaS product offering. Barring its flat IaaS performance, cloud subscriptions in SaaS and PaaS registered a sales growth rate of 24% in FY14. Although this is lower than growth rates from Salesforce and SAP, Oracle has some opportunities to inorganically boost its growth in SaaS and PaaS. On the IaaS front, we believe Oracle does not have strong prospects of growth, particularly because of the enormous market share of Amazon’s Web Services (AWS) in the IaaS market and its cut-throat pricing. AWS has a market share of nearly five times its next fourteen competitors, indicating the scale it has built in the IaaS space. [3]

3. Engineered Systems To Accelerate Hardware Product Sales

Over the past few years, Oracle aggressively promoted its broad range of Engineered Systems that run on a Unix-based SPARC architecture. Despite the advantage of having a standard procedure for the x86 architecture, most advanced software packages that are employed on high-performance servers were still compatible on a Unix system. After the acquisition of SUN Microsystems, Oracle shutdown the OpenSolaris project and returned Solaris to its proprietary roots as the most fully featured of the Unix-based operating system.

This measure was meant to refocus its Unix Enterprise offering on its core users by creating a closed, Unix-based, Solaris system.  The aim was to accommodate customer upgrades and generate share gains from incremental Unix deployments and migrations. The standardization of Solaris through the closing of the OpenSolaris project helped Oracle de-emphasize the x86 line of products from SUN, enabling it to focus on its high-end Engineered Systems. It continues to offer a full line of Sparc- and x86 based systems, however.  We believe these initiatives have helped Oracle stabilize the hardware products division, and should be a major driver in the division’s recovery going forward.

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Notes:
  1. Oracle’s (ORCL) CEO Larry Ellison on Q4 2014 Results – Earnings Call Transcript, Seeking Alpha, June 2014 []
  2. SAP CFO Says Cloud Deals to Outpace Traditional Software by 2020, Bloomberg, September 2014 []
  3. Amazon and Microsoft top Gartner’s IaaS Magic Quadrant, ZDNet, June 2014 []