Oracle Q3’17 Earnings: IaaS Could Emerge As A Dark Horse

March 16th, 2017 by Trefis Team
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Oracle (NYSE:ORCL), released its Q3’17 earnings on March 15th, and managed to beat its own guidance, as cloud revenues continued to grow faster than the fall in legacy software license sales, which was supported by accelerated sequential growth in NetSuite.

Brief Highlights of Q3

  • Net sales rose 3% on a constant currency basis, which was led by a 63% and 3% year-on-year (y-o-y) surge in Cloud and Updates & Support revenues, respectively, primarily led by new customer additions.
  • Within Cloud, Infrastructure-as-a-Service (IaaS refers to virtual computing infrastructure provided by third party over the internet) emerged in the limelight with 19% y-o-y revenue growth compared to a 9% growth in Q2, due to benefits from the second generation infrastructure deployment.
  • New software sales continued to fall – by 15% in Q3 – because of evident cloud migration.
  • Non-GAAP EPS stood at $0.69 which was 5 cents higher than the higher end of guidance, primarily helped by lower taxes.
  • Trailing twelve month Free Cash Flow dropped by over 6% to $11.8 billion due to higher capital expenditures.

Going forward, the two factors which will likely be significant in Oracle’s growth are the rise of IaaS, and growth in the company’s customer base, which we discuss below.

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See our complete analysis for Oracle

Larry Ellison Believes IaaS Will Grow Faster Than Saas & PaaS

For a long time, the focus of cloud growth remained on software-as-a-service (SaaS refers to software/applications hosted centrally by third party over the internet) and platform-as-a-service (PaaS refers to platform for application development hosted by third party over the internet). However, Larry Ellison’s stance on IaaS can change that soon, as he believes that Oracle’s second generation infrastructure can run its database 10 times faster than on Amazon Web Services (AWS). While Oracle’s IaaS revenues are just 1/20th of AWS’s, it is worth noting that the company has guided for IaaS to achieve growth rates higher than those of SaaS & PaaS in the future, i.e. over 80%. This resonates with the fact that the IaaS market is expected to be the fastest growing segment within cloud, with growth rates of over 35% according to Gartner’s forecasts for 2017. In the coming reporting periods, IaaS revenues should also increase as a percentage of Oracle’s total Cloud revenues, and will have a corresponding greater impact on Oracle’s total valuation. Currently, IaaS revenues account for 15% of total Cloud revenues.

Growing Customer Base Shows Confidence In Oracle’s Technology

Oracle registered 1,125 new SaaS and 2,586 new IaaS customers in Q3, which resulted in deferred revenues crossing $2 billion, with an annualized run rate touching $5 billion. The second generation infrastructure is claiming faster processing speeds, and expansion of Exadata Cloud Machine into database workloads is further bridging the gap between on-premise and cloud. The introduction of these innovative solutions can play a vital role in boosting the new customer base, especially in the form of companies which were earlier reluctant to shift their data centers outside their premises due to data security reasons.

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