Strength In Cloud SaaS Helps Drive Oracle’s Q2 Results

December 15th, 2017 by Trefis Team
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Oracle (NYSE:ORCL) announced its Q2’18 results on December 14, reporting a strong performance from its Cloud Services division. In addition, Software Licenses and Services segment revenues were also up after a lackluster performance in fiscal 2017, ended May. Hardware revenues, on the other hand, remained fairly low – a trend consistent in recent quarters.

We have a $51 price estimate for Oracle’s stock, which is in line with the current market price. Oracle’s stock price has fluctuated between $48 and $53 in the last six months.

See our complete analysis for Oracle

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Expected Strong Performance From Cloud Services

In line with expectations, Oracle’s Cloud Services revenues – including SaaS (Software-as-a-Service), IaaS (Infrastructure-as-a-Service) and PaaS (Platform-as-a-service) – were up 44% to $1.5 billion for the quarter. In recent years, Oracle has witnessed strong revenue growth for its Cloud Services segment. Oracle’s SaaS revenues have grown faster than the industry-wide growth rates in recent years. This trend has continued in fiscal 2018 as well, with high double digit growth in Q1 and Q2. Cloud SaaS revenues were up 55% to $1.1 billion for the quarter. As a result, we forecast the company to continue to gain share in the SaaS market.

Furthermore, SaaS margins were up 6 percentage points to 65% for the quarter. The company remains committed to achieving long-term gross margins of around 80% for the Cloud SaaS segment.

Similarly, combined PaaS and IaaS revenues rose 21% on a y-o-y basis to $396 million. 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) and Salesforce (NYSE:CRM) in the IaaS market. While the company expects strong growth in the coming years, margins for the segment could suffer as the company expands geographically. IaaS and PaaS margins were down 4 percentage points to around 40% for the quarter.

Despite lower margins for PaaS and IaaS, Oracle’s company-wide margins improved, leading to a 10% increase in non-GAAP operating income, as shown above. Non-GAAP operating income was up to $4.2 billion for the quarter, while its operating profit margin expanded by 160 basis points over the year-ago period to 43.7%. Resulting non-GAAP earnings per share rose to 70 cents, slightly higher than the mid-point of the guidance given at the end of the previous quarter.

Guidance For Q3 FY 2018

Oracle’s management has given modest guidance (with respect to consensus estimates) for the third fiscal quarter, with combined cloud services (IaaS, PaaS and SaaS) revenues expected to increase 23% on a y-o-y basis to $1.5 billion. 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. Revenues from all other segments combined are expected to be about flat over the comparable prior year period, as shown below. With IaaS and core business margins likely to suffer in the near term, Oracle’s non-GAAP earnings per share is also expected to be about flat over Q3 FY’17 at around 69 cents per share.

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