What To Expect From Oracle Through FY’19 After Recent Slowdown In Revenues

by Trefis Team
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Oracle (NYSE:ORCL) announced its fiscal Q1 2019 results on Monday, September 17, reporting a modest 1% annual increase in revenues to $9.2 billion. While core Cloud Services and License Support revenues were up 3% to $6.6 billion, the company reported declines in other revenue streams. Cloud license and on-premise license revenues fell 3% to $867 million, hardware revenues fell 4% to $904 million and services revenues fell 5% to $813 million for the quarter. Going forward, we forecast Oracle’s combined Cloud Services & License Support revenues (which includes SaaS, PaaS, IaaS and software support revenues) to increase 5-6% on a y-o-y basis to around $28 billion for the current fiscal year. On the other hand, we forecast the company’s core on-premise software licenses, hardware and services revenues to witness modest declines. Accordingly, full year combined non-cloud revenues should be 5-6% lower than FY’17 levels at around $12.9 billion. We have summarized the company’s fiscal 2019 outlook, based on the company’s guidance and our own estimates, on our interactive full year earnings forecast dashboard for Oracle. If you disagree with our forecasts, you can change the key drivers – such as segment revenue and margins – for Oracle to gauge how changes will impact its expected earnings.

Key Growth Drivers

Oracle’s combined Cloud Services (SaaS, PaaS and IaaS) revenues have driven growth in recent quarters, while Software License and Product Support revenues have witnessed limited growth. As a result, we forecast Oracle’s combined Cloud Services and License Support revenues to increase 6-7% on a y-o-y basis to $28 billion for the year. However, it is important to note that the growth in some of Oracle’s fastest-growing businesses has slowed down in recent quarters. In addition, hardware and services revenue streams have witnessed low single-digit declines. As a result, we forecast full year combined revenues to be up only around 2-3% to $41 billion.

In terms of margins, SaaS margins have improved by around 2-3 percentage points through the previous fiscal year to over 65%. The company remains committed to achieving long-term gross margins of around 80% for the Cloud SaaS segment, while IaaS and core business margins will likely see some pressure in the near term. On the other hand, the Software segment has maintained high gross margins of over 95% in recent years. Oracle has managed its operating expenses (particularly sales and marketing expenses) efficiently in FY’18, which led its non-GAAP operating margin to expand by over a percentage point. However, the impact of this also normalized in the first quarter, with its operating margin (non-GAAP) staying flat over the comparable prior year period. Going forward, we expect this to continue in FY’19, with the operating margin remaining in the 41-42% range, roughly flat over FY’18. To boost earnings, Oracle has been active in share repurchases in recent quarters. Through the August ended quarter, Oracle repurchased 212 million shares for $10 billion (440 million shares repurchased in the last twelve months). The company has plans for repurchases worth $12 billion in the coming quarters. As a result, we expect net income and EPS to be up in mid single digits over the comparable prior year period to over $13 billion and $3.20, respectively.

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