An Overview Of Oracle’s 2017

Oracle (NYSE:ORCL) has witnessed strong growth in its cloud business in recent years, which has been offset by a slowdown in the company’s core software license business. Furthermore, Oracle’s hardware product segment has seen a decline in recent years while services revenues have also remained largely unimpressive. This trend has continued through fiscal 2017, with combined Cloud Services revenues driving growth. In addition, the cloud business has also improved its profitability throughout the year.

Oracle has reported a 7% annual increase in revenues to just under $19 billion through fiscal 2017 thus far, while its gross margin has been roughly flat over the comparable prior year period. Despite an improvement in margins for the cloud segments, the company-wide gross margin was slightly lower since the cloud business typically has lower margins as compared to the on-premise software deployment model.

Oracle’s operational efficiency improved through the year, due to a comparatively limited increase in operating expenses. The resulting non-GAAP operating income was up 11% to almost $8 billion, and the non-GAAP operating margin expanded by 150 basis points on a y-o-y basis to 42.4%. Net income and diluted earnings per share were both up by double digits to $5.7 billion and $1.32, respectively.

Cloud Services Continue To Drive Growth

In recent years, Oracle has witnessed strong revenue growth for its Cloud Services segment, which include SaaS (Software-as-a-Service), IaaS (Infrastructure-as-a-Service) and PaaS (Platform-as-a-service) revenue streams. Combined revenues through the fiscal year were up 48% to $3 billion. The company’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 58% to $2.2 billion in the current fiscal year. We forecast the company to continue to gain share in the SaaS market in the coming years.

Furthermore, SaaS margins have improved by 7 percentage points to 66% in FY’18. The company remains committed to achieving long-term gross margins of around 80% for the Cloud SaaS segment. Comparatively, gross margins of the IaaS and PaaS segments were down 13 percentage points to 42%. Combined IaaS and PaaS margins for the segment are expected to continue to see pressure as the company expands geographically.

In terms of revenues, PaaS and IaaS revenues combined were also up 25% on a y-o-y basis to $801 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 (NASDAQ:AMZN) AWS and Salesforce (NYSE:CRM) in the IaaS market.

Oracle’s core software revenues were roughly flat over the comparable prior year period at just over $12 billion, with margins also standing at previous year levels. Hardware sales were down 6% on a y-o-y basis to $1.9 billion. Similarly, the Services segment reported a modest 4% annual growth in revenues to $1.7 billion, as shown above.

Expectation For The Current Quarter

Combined Cloud Services (IaaS, PaaS and SaaS) revenues are expected to increase by 23% on a y-o-y basis to $1.5 billion for the current quarter. The expected growth rate is slower than previous quarters, mainly due to the large base factor leading to tougher year-over-year comparisons. The demand for on-premise deployment of software and applications is likely to continue to be low in the coming quarters. As a result, hardware and new licenses revenues could also witness limited growth. Revenues from all other segments combined are expected to be about flat over the comparable prior year period, as shown below.

We have a $51 price estimate for Oracle’s stock, which is slightly higher than the current market price. Oracle’s stock price has fluctuated between $46 and $53 in the last six months. You can modify the interactive charts in this note to gauge how a change in individual drivers can have on our price estimate for Oracle.

See our complete analysis for Oracle

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