Oracle Earnings Preview: Cloud-Based Segments To Continue To Drive Growth

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Oracle (NYSE:ORCL) is scheduled to announce its Q2 fiscal 2018 results on Thursday, December 14. The company has reported a solid set of results in recent quarters, primarily driven by strong demand for cloud services. Oracle’s IaaS, PaaS and SaaS revenues grew at high double digits through the year, with the trend expected to continue through fiscal 2018 as well. On the other hand, revenues from the company’s core software licenses business, hardware business and its services segment have largely stagnated, partially offsetting the surge in its cloud business.

We have a $51 price estimate for Oracle’s stock, which is about in line with the current market price. Oracle’s stock price has rallied from $38 at the beginning of the year to around $52 currently, following a strong results and positive guidance from the company.

See our complete analysis for Oracle

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Guidance For Q2 FY 2018

Oracle’s management has given positive guidance for the first fiscal quarter, with combined SaaS (Software-as-a-Service), IaaS (Infrastructure-as-a-Service) and PaaS (Platform-as-a-service) revenues expected to increase 40% on a y-o-y basis to $1.5 billion. Revenues from all other segments combined are expected to be around 2% lower at $7.8 billion, as shown below. With margins likely to expand through the quarter, Oracle’s non-GAAP earnings per share is expected to be around 11% higher on a y-o-y basis to 68 cents per share.

SaaS, PaaS & IaaS To Help Sustain Growth

As shown in the table below, Oracle’s cloud segment has been the only revenue stream to witness growth in recent years. Fiscal 2017 was termed as a turnaround year for Oracle in terms of transitioning its customers to cloud-based offerings, with revenues jumping 50% to $3.6 billion. The trend has continued in FY’18 thus far, with robust revenue growth across cloud services segments.

As customers increasingly opt for cloud-based services including SaaS, IaaS and PaaS, the demand for on-premise deployment of software and applications is likely to suffer. As a result, hardware and new licenses revenues for on-premise solutions have suffered in recent years. This trend is likely to continue in the coming years, with Oracle expecting a 2% decline in non-cloud revenues for Q2 FY’17.

In terms of specific markets, Oracle is a leading cloud ERP (Enterprise Resource Planning) provider, with the market expected to grow by 7% annually to reach $40 billion by 2020. Oracle’s SaaS revenues have grown faster than the industry-wide growth rates in recent years. As a result, we forecast the company to continue to gain share in the SaaS market.

Similarly,  IaaS revenues have also grown by double digits in recent years. Oracle’s management has indicated that this segment is expected to continue to grow faster than SaaS in the future. The company plans to compete directly with Amazon’s (NASDAQ:AMZN) AWS and Salesforce (NYSE:CRM) in the IaaS market.

In addition to revenue growth, a higher mix of cloud revenues has helped improve margins. The company is targeting gross profit margins of around 80% for its SaaS business. Oracle’s non-GAAP operating profit margin has expanded by over a percentage point in recent quarters – a trend likely to continue through fiscal 2018.

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