Oracle Q2’15 Earnings Review: Cloud’s Success Helps Beat All Expectations
Oracle Corp. (NYSE:ORCL) posted strong results for the second quarter of fiscal 2015 on December 17th. (The company follows June-May fiscal year.) The software giant reported revenues of $9.6 billion and EPS of $0.69, exceeding consensus revenue estimates of $9.52 billion by a comfortable margin and EPS estimate of $0.68 by one cent. With a revenue growth rate of 7% compared to the previous year, the company also beat its own estimate of 0% to 4% growth. The reported EPS was at the higher end of Oracle’s estimated $0.66 – $0.70 range as well. Strong revenue growth also trickled down to the bottom line, as non-GAAP operating income expanded by 7% year on year to reach $4.4 billion, achieving a non-GAAP operating margin of 46%.
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The highlight of the quarter was the cloud business, revenues from which grew by 47% year over year on the back of new bookings from previous quarters. On-premise software licenses grew by 6%, while hardware systems revenues beat expectations of a decline and expanded by 4%. However, strengthening of the US dollar had a significant impact on the results. Total revenue suffered by four percentage points from currency headwinds, while growth rate of software and cloud as well as hardware systems was affected by three percentage points.
The company guided total revenue growth in the third quarter to grow between 4% – 8% year to year, while non-GAAP EPS is expected to be in the $0.69 to $0.74 range in constant currency basis. For this guidance, the company has assumed a non-GAAP tax rate of 24%, although the actual tax rate may vary notably on account of currency headwinds.
Cloud Business Continues to Impress
Oracle’s cloud business surpassed expectations to reach total revenue of $590 million, up from $475 million in the previous quarter at a 47% year-over-year clip. Its constituents, Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS), accelerated by 41% compared to the previous year to reach $364 million in revenues. Infrastructure-as-a-Service (IaaS), which competes with Amazon’s Web Services (AWS) to provide on-demand server and storage space to businesses, expanded by 62% year over year to reach revenues of $155 million.
While all three of these segments exceeded growth expectations, we believe that the high growth rate is partly a result of low base in the previous year. Details of Database-as-a-Service (DaaS), which was introduced in September and forms the final component of the cloud business, were not reported.
Bookings remained strong and grew in excess of 50% across all categories. Further, bookings in Oracle’s Fusion apps, Enterprise Resource Planning (ERP), Human Capital Management (HCM) and Sales Force Automation (SFA) repeated the triple digit growth that they achieved in the first quarter. The company added over 860 customers in SaaS and 150 in PaaS, compared to the combined 500 additions in the first quarter.
These new bookings represent over $170 million in new annually recurring revenues from SaaS and PaaS. The company expects to add over $250 million of new annual SaaS and PaaS subscriptions in the fourth quarter, indicating a run rate of over $1 billion for fiscal 2015. If achieved, it will bring Oracle up to the level of Salesforce.com (NYSE: CRM), the market leader in cloud.
Oracle’s guidance for non-GAAP SaaS and PaaS revenue growth stands in the 30% – 34% range on constant currency basis, while IaaS is expected to grow 29% to 33%. We believe that the strong bookings achieved in each of the three categories will sustain revenue growth rates of the cloud business in the near term. The company’s rapidly increasing clout in the cloud business will be further bolstered by revenues from the recently released DaaS, allowing it to pose a major challenge to the market leader, Salesforce.
On-Premise Software Licenses Recover
After declining by 2% in the first quarter, on-premise software license revenues regained positive territory in the second quarter and expanded by 6% year-on-year. Revenues from new software licenses were an impressive $2 billion, compared to $1.37 billion in the first quarter. The company guides total cloud and software revenue, including new software licenses, to grow between 5% to 8% in the third quarter.
This growth in on-premise software revenue is a welcome exception to the general shift in the industry to the cloud. Indeed, for companies with sufficient scale, there will always be advantages on-premise database management. That said, the key take-away in these results is the far stronger growth of Oracle’s cloud business. We believe that, on balance, sales of new software licenses will continue to decline in the medium to long term.
Hardware Grows Against Expectations
The hardware business recovered from a disastrous first quarter and despite expectations of deceleration, managed a commendable 4% growth (7% in constant currency). This expansion is even more notable considering that the company had guided a decline of as much as 10% in the first quarter earnings call.
Hardware systems product revenues stood at $717 million while hardware support revenues were $690 million on a constant currency basis. Engineered systems product category, which falls under the hardware systems division, continued its double digit growth rate. Bookings for Exalogic, SuperCluster and big data appliance engineered systems grew more than 50% during the quarter.
The company guides third quarter hardware revenue, including hardware products and hardware support, to be between negative 2% and positive 8% in constant currency. We believe that new engineered systems bookings acquired during the first two quarters will boost Oracle’s revenues from engineered systems in the following quarters, which will in turn partially prop up the troubled hardware business revenues.
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