Oracle Earnings Preview: Cloud Likely Saw Higher Growth As IaaS Comes Into Focus
Leading software company, Oracle (NYSE:ORCL) is scheduled to release its fiscal Q1’17 earnings on Thursday, September 15th. (Fiscal years end on May 31st.) Oracle’s revenues have remained relatively flat in recent as has its net profit. The primary reason for this has been a paucity of growth in demand for on-premise Enterprise software. This in turn is the result of the shift in business computing to third-party data center services, or the so-called Cloud. Many in the industry feel that Oracle has been late in its transition to cloud computing. That said, the company has a very large database management software business, a type of computing many business are disinclined to situate in third-party data centers. Still there is the need to satisfy demand for cloud-based database and applications software. To fill this gap quickly, Oracle has been acquiring the companies which already have specialized cloud products. For instance, in the previous quarter, Oracle announced its plan to acquire Netsuite, which is a leader in cloud ERP (Enterprise Resource Planning) software.
In FY 2016, Oracle’s total cloud revenues (SaaS, PaaS and IaaS) grew by 36% from $2.2 billion to around $ 2.9 Billion. The growth seems impressive, but even if Oracle continues to grow at a similar pace for the next 5 years, which is going to be a challenging task, we believe that its revenues might remain relatively flat due to the offsetting decline in its on premise software revenues, which at present accounts for around 70% of its total revenues. During the smae quarter, Oracle’s licensing revenue declined by 14%. It is no surprise then that Oracle’s CEO Safra Catz has guided for even higher cloud revenue growth in FY 2017.
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Tough Competition From Salesforce And Microsoft
Oracle is also facing a fierce competition from other cloud players, mainly Salesforce (NYSE:CRM), Microsoft (NYSE:MSFT), the latter of which has a siazable on-premise business as well. Oracle’s cloud revenues have grown at around 34% CAGR from around $1 billion in 2012 to around $ 2.4 billion in 2015. On the other hand, Oracle’s primary competitor in SaaS and PaaS, Salefsorce, has been able to achieve similar cloud revenue CAGR of nearly 30% from $2.87 billion in 2012 to $ 6.2 billion in 2015 on a higher revenue figure. So, it is not going to be easy for Oracle to compete in this market, as it aims to double its cloud revenue growth rate than that of its competitors in coming years, and to become the first company to reach the $ 10 billion mark in SaaS revenues.
Increased Focus on Infrastructure-as-a-Service (IaaS)
To compete in the cloud market, Oracle is aiming to increase its focus on IaaS, which its chairman Larry Ellison believes is a less talked about segment. Oracle has made investments in building the second generation data centers which it claims will offer competitive costing and better performance, security and reliability compared to its peers [1]. There might be some sort of benefits from this investment, that Oracle might have reaped in Q1’2017. Also, Oracle is expecting its existing database customers to move their applications onto its cloud, which might trigger good growth in IaaS segment. For these reasons, we believe that Oracle’s cloud growth in all three segments will continue to see a higher growth rate offsetting the declines from on-premise segment.
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