Can The Cloud Really Save Oracle Stock Now?

  • Oracle has delivered mixed Q2 FY 16 results and issued weak Q3/Q4 guidance.
  • The weak guidance has led Oracle stock lower, which is now 19% down YTD.
  • Can Oracle's cloud do the trick and pull the company out of its current revenue tailspin?

Oracle (NYSE:ORCL) has reported mixed Q2 FY 16 results that beat on the bottom line but missed on top line estimates. Oracle reported net revenue of $8,993 million for the quarter, a 6.3% Y/Y decline, and $60 million less than consensus analysts’ estimate. The enterprise software company also reported non-GAAP EPS of $0.63, beating the consensus by $0.03. Investors should note that Oracle managed to beat on the bottom line because it benefited from a lower-than-expected tax rate of 20.4%.

Revenue performance by segment:

  1. Software/cloud: on-premise software revenue fell 7% to $6.4B while cloud revenue (SaaS, Paas, & IaaS) was up 26% to $694M. New software license sales were down 18% to $1.68B due to the ongoing shift to the cloud. License updates/product support were down 2% to $4.68B.
  2. Hardware: revenue fell 16% to $1.12B mainly due to a decline in UNIX server sales and general weak enterprise spending on IT hardware. Hardware products were the hardest hit dropping 20% to $573M while hardware support revenue was down 11% to $550M. Services revenue (excluding hardware and software support) was down 8% to $861M.

Oracle is increasingly becoming a stock buyback champ: the company spent $3.4B on stock buybacks compared to $2.4B the previous quarter. Oracle’s GAAP expenses stayed on a constant currency and up 5% Y/Y to $6.04B while sales and marketing expenses increased just 3% to $1.95B.
The investing world was at first pleased by Oracle’s results since the company’s 2% growth for on-premise/cloud sales was at the higher end of Oracle’s guidance. But then the Oracle went ahead and issued soft Q3/Q4 guidance. Oracle said that it expected Q3 revenue growth of 0%-3% in constant currency, with EPS of $0.63-$0.66. The consensus is for -0.6% revenue growth in constant currency and EPS of $0.65.

Meanwhile the Oracle said it expects Q4 revenue growth to clock in the 1%-3% range with EPS of $0.83-$0.86. Oracle stock tanked 7% after the guidance. Oracle stock is down 19% YTD.
ORCL stock chart

Source: Oracle Stock Price Data by

Oracle’s cloud in focus

Oracle’s quarterly earnings have become quite predictable, with all of Oracle's revenue segments reporting serious declines--with the exception of the cloud. On the hardware side of things, Oracle has grown to become the market leader in integrated platforms. These are servers that are optimized for specific workloads. But this is not something you can easily tell looking at Oracle’s hardware sales which have been on a constant decline ever since Oracle purchased Sun Microsystems back in 2010.

So Oracle is now pinning all its hopes on its cloud to pull it out of its current revenue tailspin. But looking at Oracle’s cloud growth you do not get a sense that this is something that is going to happen soon. Oracle’s cloud sales increased 26% to $694M. Corporate revenue, however, was down 6.3%. In real dollar terms, Oracle’s cloud revenue increased $143M but was accompanied by a huge $605M revenue decline across the company’s other segments. The common argument by Oracle bulls that Oracle’s cloud sales can compensate for loss by on-premise software sales also does not seem to hold much water when you consider that on-premise software sales fell by $453M, more than triple the gain in cloud revenue.

To be fair, there is a good chance that Oracle’s cloud revenue growth will accelerate in the coming quarters since Saas/PaaS billings have been exceeding cloud revenue growth by a big margin in recent quarters. Q2 SaaS/PaaS billings were up 68% compared to 39% growth for the two cloud platforms. In fact Oracle predicts that SaaS/PaaS revenue growth will hit 49%-53% during the third quarter, and 55%-59% during the fourth quarter.

That will be quite a dramatic improvement in Oracle’s cloud growth rate. But, it will still be way below that by the market leaders Amazon (NASDAQ:AMZN) AWS and Microsoft’s (NASDAQ:MSFT) Azure. Both AWS and Azure are currently on a $6B+ annual revenue run rate (more than double Oracle’s cloud size) yet both are growing much faster than Oracle’s cloud--78% for AWS and more than 100% for Azure during the last quarter.

Oracle has been growing its cloud mainly through acquisitions as opposed to the cloud leaders who are mostly growing organically. Relying too heavily on inorganic growth can limit a Oracle's growth runways.


Oracle has been touting its transition from an on-premise software company to a cloud software company--and to a certain degree Oracle is succeeding in the cloud game. The big problem here is that the rest of its businesses are disintegrating much faster than its cloud is growing thus leaving the Oracle badly exposed. Over the short-term, Oracle stock can make good gains in 2016 if the projected cloud growth in Q3 and Q4 materializes. The mid- and long-term outlooks, however, depend on whether Oracle will be able to keep improving its cloud growth to approach or even match that by the market leaders.

Brian Wu Brian Wu   on Amigobulls :
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