Oracle Takes Aim at Salesforce.com as Currency Headwinds Eat Into Q3 Revenues

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Global software major Oracle Corp. (NYSE: ORCL) reported its fiscal 2015 third quarter results on March 17th. (Fiscal years end with May.) Total third quarter revenues remained flat at $9.3 billion as currency headwinds wiped out the relentless expansion in the cloud business. On a constant currency basis, it increased by 6%.  As in the previous quarter, the high-points of the third quarter were the cloud business and the engineered systems product line. Revenues from the cloud business accelerated by 29% year on year  in the third quarter, while revenues from sale of on-premise software licenses declined by 7%. Further, the growth in engineered systems was not enough to preclude a year on year decline of 2% in the hardware business. On the bottom lines front, operating income declined by 5% year on year to $3.4 billion, with an operating margin of 36%. GAAP EPS contracted by 1% year on year to $0.56, while non-GAAP EPS was flat at $0.68. On a constant currency basis, Oracle achieved its guidance on all metrics.

Oracle emphasized that its primary focus is to expand the cloud business aggressively and overtake the cloud computing leader and Oracle’s fierce rival, Salesforce.com (NYSE: CRM). Executive Chairman and CTO Larry Ellison stated that the company is on track to exceed $1billion in new Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) business in fiscal 2015, which may help it overtake Salesforce as the global leader in cloud computing ahead of Oracle’s 2016 target. [1]

Oracle guides total revenue growth in the fourth quarter to range from 1% to 6%. The on-premise software and cloud business, including support revenues, is expected to grow by 2% to 6%. Revenue growth in the hardware business is guided to range from negative 2% to positive 8%. Non-GAAP EPS is guided to be in the range of $0.90 to $0.96.

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We are currently revising our price estimate of $47 for Oracle to reflect the third quarter results.

See our complete analysis of Oracle Corp. here

Expansion of Cloud Business Continues Unabated

Revenues from SaaS and PaaS expanded by 30% year on year (34% on constant currency basis) in the third quarter, while revenues from Infrastructure-as-a-Service (IaaS) grew by 28% (32% on constant currency basis) year on year. Oracle Fusion leads the way with over 200% revenue growth in every quarter this year so far. In contrast to the cloud business, revenues from sale of on-premise software licenses contracted by 7% (flat on constant currency basis) year on year.

Oracle has guided SaaS and PaaS to grow by 27% to 31% in the fourth quarter, while IaaS is guided to grow by 29% to 33%. Bookings are expected to touch $300 million in the fourth quarter, and full year bookings growth is expected to be over 100% year on year.

Engineered Systems Lead Hardware Growth

Engineered systems’ star continues to rise on the back of double digit year on year growth (constant currency terms) in every quarter. Revenues from engineered systems grew by 15% in constant currency terms in the third quarter, compared to the 5% growth in the overall hardware business. Oracle claimed that it is gaining share against IBM (NYSE: IBM) and HP (NYSE: HPQ) and expects to lead the high-end server market in 2015. [2]

The company does not report revenues from engineered systems separately, although it stated that at the end of the first quarter of fiscal 2015, engineered systems accounted for a third of hardware product revenue. [3] However, in the third quarter earnings call, Co-CEO Mark Hurd stated that engineered systems are now a “significant part” of the hardware business. The company expects this product line to pick up even more pace in the fourth quarter. [2]

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Notes:
  1. Oracle 2015 Third Quarter Earnings Press Release, SEC Filings, March 17, 2015 []
  2. Oracle 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, March 17, 2015 [] []
  3. Oracle 2015 First Quarter Earnings Call Transcript, Seeking Alpha, September 18, 2014 []