Oracle: Weak Hardware And New License Sales Dim Earnings Report As Management Changes Loom

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Fiscal first quarter results for database leader Oracle Corp. (NYSE:ORCL) trailed consensus estimates. (Fiscal years end with May.) Q1’15 revenues stood at $8.6 billion against consensus estimates of $8.77 billion. This represents a year-on-year growth rate of 3%, lower than its quarterly guidance of 4%-6%. Cloud revenues registered robust growth while sales from new software licenses and hardware products declined on a year-on-year basis. Oracle’s quarterly earnings per share stood at $0.62, at the lower end of its quarterly guidance and lower than analyst estimates of $0.64.

The company announced a shuffle in its top management roles along with the earnings release, with Chief Executive Officer (CEO) Larry Ellison being appointed as Chief Technology Officer (CTO) and the Executive Chairman. ((Oracle Board Appoints Larry Ellison Executive Chairman and CTO, Oracle Press Release, September 2014)) Mark Hurd and Safra Catz, who held President roles previously, would be serving as co-CEOs. [1] Manufacturing, legal and finance teams at Oracle will report to Safra Catz while sales and service teams and vertical industry business units will report to Mark Hurd. Ex-CEO Larry Ellison is reported to oversee the software and hardware engineering functions.

In this earnings note, we highlight key takeaways from Oracle’s Q1FY15 results. We are currently revising our $46 Trefis price estimate for Oracle to incorporate the latest quarterly results.

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Cloud Subscriptions Grow Faster; Guidance Looks Optimistic

In the first quarter, Oracle’s cloud sales grew 31% to reach $475 million, compared to $363 million in Q1FY14. Revenues from Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) increased 32% to $337 million this quarter. Additionally, this strong growth in the SaaS and PaaS units was supported by strong growth in Infrastructure-as-a-Service (IaaS) sales during the quarter. Oracle’s IaaS business, which competes with Amazon’s Web Services (AWS) to provide on-demand server and storage space to businesses, expanded 26% year-on-year to reach $138 million.

More importantly, Oracle’s rapid growth in cloud sales resulted from new customer wins. The company reported a 54% growth in bookings for the quarter, with bookings from Oracle Fusion apps, Enterprise Resource Planning (ERP), Human Capital Management (HCM) and Sales Force Automation (SFA) growing triple digits in Q1’15. [2] Over the quarterly period, the company added more than 500 new customers for its cloud business, with its Human Capital Management (HCM), Customer Experience (CX) and Digital Marketing modules being the largest beneficiaries of new customer accounts. [2]

The company expects strong cloud revenue growth going forward. SaaS and PaaS sales for Q2’15 are expected to grow between 39% and 44% on a constant currency basis. Similarly, IaaS revenues are expected to grow between 40% and 44% next quarter. As things stand, Oracle expects an annual cloud run-rate of nearly $2 billion. However, an acceleration in growth in future quarterly periods should take this run-rate higher.

New Software License Sales Decline Again; Hardware Sales Disappoint

First quarter sales for new licenses stood at $1.37 billion, 2% lower (~$30 million lower) than its Q1’14 sales of $1.4 billion. Oracle’s new license sales for Q1’15 represent approximately 16% of total quarterly revenues.  Comparatively, new license sales as % of total quarterly revenues stood at 20% in Q1’14, reflecting the stronger growth of the On Demand side of the business.

In part, we believe this decline in new license sales was due to the migration of new customers from an on-premise deployment model onto a cloud system. During the same year-over-year period, Oracle’s cloud subscription sales increased nearly $110 million. Going forward, Oracle expects the movement to the cloud to grow further. The company expects overall software and cloud revenues (which include new license, support and cloud) to grow between 3% and 6% for Q2’15. Given the strong growth rates expected in its cloud business, and with support revenues growing 6%-7% every quarter, we expect new license sales to continue to decline in Q2’15.

On the hardware front, Oracle’s new product revenues declined 14% to $578 million. Hardware support sales also declined 1% to $587 million for the quarter. While the high-end engineered systems, which now accounts for a third of hardware product sales, continued to grow at double digit pace, other server and storage systems witnessed a sharp slide in demand. Sales from Oracle’s SPARC systems declined this quarter while storage systems, particularly the tape storage system, under-performed. [2] Additionally, a new product release from Oracle’s Sun Storage Archive Manager (SAM), due to launch at the Oracle OpenWorld Conference, also contributed to weak hardware sales this quarter. [2]

However, we believe weak demand for SPARC servers and Tape storage systems had a bigger impact than product launch of Oracle’s Sun SAM on the hardware division. For the next quarter, Oracle expects overall hardware sales to decline between 0%-10% on a year-on-year basis.

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Notes:
  1. ref:1 []
  2. Oracle’s (ORCL) CEOs Safra Catz and Mark Hurd on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, September 2014 [] [] [] []