Oracle Earnings Preview : Top Line Looking Strong In Light Of Recent Deals
The world leader in relational databases, Oracle (NYSE:ORCL), is all set to report its Q4’17 and FY’17 annual results on June 21, 2017. Over the last two years, Oracle’s revenue growth has shifted from on-premise software to cloud based software-as-a-service (SaaS) and platform-as-a-service (PaaS). In FY’15 and FY’16, the decline in on-premise revenues outnumbered the gain from cloud sales, which was a worry for the company given that it has been an undisputed leader in the database industry since its inception.
However, all this changed during the first nine months of FY’17 when the gains from cloud revenues surpassed the loss in revenue from the legacy on-premise business backed by the NetSuite acquisition and increased focus on SaaS, PaaS, and lately IaaS (Infrastructure-as-a-service) technology.
In line with the previous trend and its current guidance, we believe that Oracle will fulfill its target of achieving 2% organic growth for the full year due to some big deals which closed in the quarter. Moreover, the Netsuite effect is likely to last in this quarter as well, pushing the y-o-y comparison into the positive territory. Analysts are estimating the revenues to be $10.45 billion which are lower than what were reported during the last year, but in our view, Oracle might go on to beat the analyst estimates due to the above mentioned reasons in addition to a better currency situation.
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New Deals Kept Flowing In the Quarter
Oracle continued to crack the market for cloud deals with large enterprises in Q4. The major breakthrough came in a deal with AT&T, where AT&T will be moving thousands of its large scale databases to Oracle’s cloud IaaS and PaaS. The estimated revenue to be generated by the deal has not been reported by the company, but it will definitely be a boost to Oracle’s Infrastructure-as-a-service which has recently been brought into limelight by Chairman Larry Ellison on various occasions in regards to its competitive fight with AWS (Amazon Web Services). Apart from this, Oracle managed to close deals with Emerson, Movenpick Hotels & Resorts, 7-Eleven, and a few other enterprises.
In its guidance, Oracle was expecting a volatile currency situation for the quarter. However, these headwinds might have been dampened to some extent as the U.S. dollar index lost value during the quarter. Given the fact that Oracle derives 65% of its revenues from outside the U.S., this puts it in a favorable position to beat the analyst estimates this time around and achieve its guided target.
Mixed Bag When It Comes To Margins
SaaS & PaaS margin is hovering well over 60% and is likely to move towards the company’s target of 80% over the long term as the revenue from this business continues to inflate at a decent pace. On the other hand, IaaS business is still in its early phase and has been undergoing higher investments recently which can lead to a further hit to its margin. IaaS gross margin declined to under 30% during the quarter ended February, as compared to 40% for CY’16.