What To Expect From Oracle’s Fiscal Q1 Earnings

by Trefis Team
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Oracle (NYSE:ORCL) is scheduled to announce its Q1’18 results on Thursday, September 14. The company reported a solid set of results through fiscal 2017, 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, offsetting the surge in its cloud business.

We have a $54 price estimate for Oracle’s stock, which is 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 set of quarterly results and a positive guidance from the company.

See our complete analysis for Oracle

Guidance For Q1 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 50% on a y-o-y basis to $1.5 billion. Revenues from all other segments combined are expected to be roughly flat over the comparable prior year period, as shown below. With margins likely to expand through the quarter, Oracle’s non-GAAP earnings per share is expected to be around 9% higher on a y-o-y basis to 60 cents per share.


Cloud ERP, PaaS & IaaS To Help Sustain Oracle’s Growth

Fiscal 2017 was termed as a turnaround year for Oracle in terms of transitioning its customers to cloud-based offerings. The company is likely to experience similar growth in the current fiscal year. Furthermore, rising margins with the top line growth could be an added advantage to boost the bottom line in the future. As shown in the table below, the cloud segment was the only revenue stream to witness growth in the previous fiscal year. This trend is likely to continue in fiscal 2018. 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 could witness limited growth in the coming years.

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, Oracle’s combined PaaS and IaaS revenue rose by almost 60% in fiscal 2017. 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 AWS (NASDAQ:AMZN) in the IaaS market, with chairman Larry Ellison claiming that Oracle’s second generation IaaS offerings are superior to AWS. While it might be too soon to compare Oracle with bigger cloud players such as Amazon and Salesforce (NYSE:CRM), Oracle has been successful in making its presence felt in the industry.

According to Oracle’s management, the company is on course to deliver 80% gross profit margins for its SaaS business. While strong revenue and margin growth in this segment can help boost net income and earnings per share, the IaaS segment’s margins have shown a negative trend in recent quarters, as the company is undergoing higher expenses and investments in the initial phase. As a result, it could be a few years before margins in the IaaS segment start expanding.

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