Cloud and Engineered Systems Set to Drive Oracle’s Revenue Growth in Q3
Global software giant Oracle Corp. (NYSE: ORCL) is slated to report its fiscal 2015 third quarter results on Tuesday, March 17th (the company follows June-May fiscal year). Having posted strong results in the second quarter thanks to the rapid expansion of its cloud computing business, expectations are ripe for the continuation of the cloud success story. Further, this will be the first earnings report since Oracle initiated an aggressive pricing strategy for its engineered systems (Read: Oracle Triggers Price War in the Servers Market). Therefore, Oracle’s hardware business will also be watched closely to determine if the strategy has paid off.
Oracle reported revenues of $9.6 billion in the second quarter, beating consensus estimates as well as its own guidance. Non-GAAP EPS stood at $0.69, exceeding the consensus estimates and at the higher end of Oracle’s guidance. The all-round performance was largely due to the unbridled growth of Oracle’s cloud business, which grew by 47% year on year in the second quarter. On-premise software licenses grew by 6%, while hardware systems revenues beat expectations of a decline and expanded by 4%. (Read: Oracle Q2’15 Earnings Review: Cloud’s Success Helps Beat All Expectations)
Oracle has guided revenue to grow between 4% – 8% year on year in the third quarter, while non-GAAP EPS is expected to be in the $0.69 to $0.74 range on a constant currency basis.
We have a price estimate of $47 for Oracle Corp., which is about 10% higher than its current market price.
See our complete analysis of Oracle Corp. here
Bookings Growth and New Products to Bolster Cloud Business
Oracle’s bookings in the cloud business have grown at over 50% year on year in the last two quarters. [1] Oracle Fusion has been a runaway success and achieved triple-digit growth in bookings as well as revenue in each of the last two quarters. The pace of acquisition of new customers has not let up so far and is expected to continue in the near future, given the rapid release of new products by Oracle during the third quarter (Read: Oracle Moving Full Steam Ahead on Cloud, Releases 3 New Offerings in 4 Days).
Perhaps more importantly, Oracle has stressed that most of the new customers are not conversion of on-premise software users, but net new wins. [2] This allays fears that Oracle’s move to aggressively push its cloud products may result in cannibalization of its revenues from licenses of on-premise software. Indeed, Oracle’s claim that most of its cloud customers are net new is supported by the fact that its revenue from on-premise software licenses expanded by 6% year on year in the second quarter.
All three components of Oracle’s cloud business, namely, Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS), have surpassed expectations and expanded at brisk clip. Oracle has stated that new annual SaaS and PaaS subscriptions are expected to reach over $1 billion in fiscal 2015, of which $250 million is estimated to be achieved in the fourth quarter.
In the third quarter, Oracle expects non-GAAP SaaS and PaaS revenue to grow by 30% – 34% on constant currency basis, while IaaS is expected to grow by 29% to 33%. Details of Database-as-a-Service (DaaS), which was introduced last September, have not been reported so far.
Recovery of Hardware Business Pinned on Engineered Systems
Oracle’s hardware business has gone downhill ever since it bet Sparc-based servers rather than x86 servers (Read: Oracle Loses 4th Spot in Global Server Market to Cisco). Its revenues from the hardware business have declined every year since fiscal 2011. However, last quarter Oracle reported a surprise growth of 4% year on year in revenues from its hardware business, thanks to the success of engineered systems. Near the end of the third quarter, Oracle demonstrated its seriousness in competing aggressively in the engineered systems (or the more commonly used term, integrated systems) market by slashing prices of its new products drastically. While this move was occurred too late in the third quarter to have an impact on the results, it does point to Oracle’s drive towards promoting its engineered systems line.
Surprisingly, Oracle has stated that it has still not abandoned the Sparc processor and claims that its new M7 line is winning over customers even among erstwhile proponents of the x86 and RISC servers. [3] However, it is pertinent to note that the company does not report separately revenues from servers and has refused to divulge details of these customer wins so far. Instead, it has preferred to tout the success of its engineered systems line, emphasizing the persistent double digit revenue growth rate achieved in this segment. This emphasis, combined with the extremely aggressive pricing strategy, leads us to believe that the future of Oracle’s hardware business is indeed pinned on engineered systems.
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Notes:- Oracle 2015 Earnings Call Transcripts: First Quarter | Second Quarter, Seeking Alpha [↩]
- Oracle 2015 Second Quarter Earnings Call Transcript, Seeking Alpha, December 17, 2014 [↩]
- Oracle says it still fully supports the Sparc processor, IT World, February 11, 2015 [↩]