Strong Cloud Growth Expected in Oracle’s Q4 Results
Leading database software vendor Oracle Corp. (NYSE: ORCL) is set to report its fiscal 2015 fourth quarter and full year results on June 17th. (The company follows June-May fiscal year.) Oracle is currently putting all its focus and considerable marketing machinery behind its cloud suite in an attempt to catch up to its bitter rival, Salesforce.com (NYSE: CRM). However, Salesforce’s growth story is still going strong (Read: Salesforce Posts Robust Q1 Results, Raises Fiscal 2016 Guidance) and it is likely to be a while before Oracle’s relatively fledgling cloud business catches up to Salesforce. On the hardware front, Oracle has placed its bets on its engineering systems product line, which expanded at year on year double-digit rates in each of the last few quarters (Read: Oracle Takes Aim at Salesforce.com as Currency Headwinds Eat Into Q3 Revenues).
Meanwhile, there has been no further word from Oracle regarding its interest, or lack thereof, in acquiring Salesforce. When the rumors of a possible takeover of Salesforce first surfaced in late April, Oracle refused to confirm whether or not it is a potential suitor. Instead, Co-CEO Safra Catz stated that Oracle may benefit from the short-term disruption in the market if another competitor were to acquire Salesforce (Read: Purported Salesforce Takeover: Microsoft Evaluating, SAP Uninterested, Oracle Noncommittal). Investors will be keenly looking for updates on the purported takeover in the fourth quarter earnings call. However, new information on the matter is unlikely to be released given the company’s tight-lipped policy.
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%. This includes revenues from Software-as-a-Service (SaaS), Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS), each of which are guided to expand at around 30% year on year in the fourth quarter. 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. [1]
We have a price estimate of $42 for Oracle, which is about 5% lower than its current market price.
See our complete analysis for Oracle Corp. here
Strong Growth Expected in Cloud but Long Way to Go
Oracle’s cloud business grew at nearly 30% annual rates in each of the last few quarters. During the nine months of fiscal 2015, its revenues from SaaS, PaaS and IaaS expanded by 35% compared to the same period previous year. Oracle is on a run rate to cross $2 billion in cloud sales in fiscal 2015. It guided has guided SaaS and PaaS revenue to grow by 27% to 31% in the fourth quarter, while IaaS is guided to grow by 29% to 33%.
While this is a commendable growth rate, the company is still far behind its biggest rival, Salesforce.com, which is set to cross $6 billion in fiscal 2016 (Salesforce follows February-January fiscal year). Salesforce is now eyeing the burgeoning cloud analytics market, and its expansion therein is likely to widen the cloud revenue gap with Oracle. However, Salesforce’s domination lies primarily in the Customer Relationship Management market, while Oracle has a presence across multiple categories. Consequently, Oracle expects to beat Salesforce in SaaS and PaaS sales in fiscal 2015. [1]
It should be noted that Oracle’s cloud bookings have grown at an outstanding pace in recent quarters. For the full year, the company expects bookings to expand by 100%, which is a strong indicator of the growth potential of Oracle’s cloud business. Bookings are especially strong in certain flagship products like Fusion, which expanded by 200% year on year in each of the first three quarters of fiscal 2015.
Engineering Systems the New Buzzword in Hardware
The importance of engineering systems in Oracle’s hardware portfolio continued to rise throughout the year. At the beginning of the year, the company stated that engineered systems accounted for a third of its hardware product revenues. [2] During the year, revenues from engineered systems grew at double digit rates each quarter, considerable outpacing the growth of the overall hardware business. It follows that by the end of fiscal 2015, engineered systems will command a much larger pie of Oracle’s hardware business.
Oracle no longer reports the standalone revenues from the components of its hardware business, namely, servers, storage and networking products, and engineered systems. However, the company reported that revenues from engineered systems expanded by 15% year on year in the third quarter in constant currency terms, compared to 5% growth in the overall hardware business. Assuming the revenue share of engineered systems at one-third, a back of the envelope calculation indicates that revenues from Oracle’s remaining hardware business remained almost stable or achieved a marginal growth at best. Thus, it can be safely concluded that the future growth of Oracle’s hardware business lies almost solely in its engineered systems product line.
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Oracle Fiscal 2015 Third Quarter Earnings Call Transcript, Seeking Alpha, March 17, 2015 [↩] [↩]
- Oracle Fiscal 2015 First Quarter Earnings Call Transcript, Seeking Alpha, September 18, 2014 [↩]