The Silver Lining Returns to Oracle Corporation’s Cloud (ORCL)

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Oracle stock - The Silver Lining Returns to Oracle Corporation’s Cloud (ORCL)

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Oracle Corporation (ORCL) stock is up close to 3% Friday morning after the company delivered quite impressive Q4 results, soundly beating revenue estimates while narrowly missing on earnings expectations.

The Silver Lining Returns to Oracle Corporation's Cloud (ORCL)Oracle reported revenue of $10.6 billion, good for a 1% year-over-year decline in constant currency, but still $130 million above the consensus on Wall Street. Meanwhile, non-GAAP per-share earnings of 81 cents was a cent short of the consensus.

On a GAAP-basis, diluted EPS clocked in at 66 cents, a 6.5% improvement compared to a year ago.

Oracle stock is now up 8% YTD, and there looks to be more upside in store.

The Cloud Shines, Again

Oracle has the robust performance of its cloud, particularly its SaaS and PaaS operations, to thank for that beat. SaaS, the cloud segment that involves selling access to applications, and PaaS, the business of selling tools to program, manage apps and analyze data, posted a combined revenue of $690 million, good for a robust 66% YoY growth.

In constant currency, SaaS and PaaS grew 68%, well above the company’s earlier guidance of 57% to 61%.

Oracle reported that it added 1,600 new SaaS and 2,000 new PaaS customers during the quarter. The company credited the rapid uptake of its Fusion ERP products, where it added 800 new customers last quarter alone, for the healthy growth.

“That’s ten-times more cloud ERP customers than Workday Inc (WDAY),” said Oracle CEO Mark Hurd.

Oracle has in the past said that it built its Fusion cloud from scratch, writing every single line of code and this originality has apparently been a major selling point.

But it could also mean that Oracle has become even more adept at playing hardball with its enterprise customers as it tries to upsell its more expensive software as per this report.

Meanwhile, Oracle’s IaaS performed much less well after posting revenue of $169 million, up a mere 5% over the year-ago quarter. Oracle has generally had a hard time competing in the IaaS, or Infrastructure-as-a-Service, market primarily because this is where the top cloud players including Amazon.com, Inc. (AMZN) and Microsoft Corporation (MSFT) are strongest. The company unveiled a rather hazy cloud strategy last year that involves heavily undercutting AWS in IaaS pricing:

“Our new archive storage service goes head-to-head with Amazon Glacier and it’s one-tenth their price.”

But going by the latest set of results, we can easily surmise that this was a dumb move by Oracle, because giving away IaaS margins does not appear to have succeeded in winning a lot of new business.

The weak IaaS performance has luckily not put a big dent on Oracle’s overall cloud growth simply because it’s much smaller compared to the other two cloud segments. Total cloud revenues clocked in at $859 million, up 49% YoY, which is quite an impressive growth clip.

Cloud Hyper-Growth

Oracle CTO and executive chairman Larry Ellison recently declared that the company’s cloud had entered the ”hyper-growth” phase. Judging by the kind of cloud guidance that Oracle gave, that declaration was probably not just another puff piece by the company’s head.

Oracle said that it expects Saas and PaaS to grow in the 75% to 80% range during Q1 FY17. That guidance was much better than the company’s earlier guidance of 59%.

For the entire FY17 (which begun in June and ends in May 2017), Oracle expects Saas/PaaS revenue to increase 65%-plus. Oracle expects Forex headwinds to be quite muted to the tune of a 1% impact on “certain businesses” thanks to a weaker dollar.

Oracle’s SaaS/PaaS growth has been accelerating: 20% in FY14, 34% in FY15 and 52% in the just-ended FY16. There is a clear trend where Oracle’s cloud growth rate is beginning to approach that by market leaders Amazon and Microsoft. AWS grew 64% YoY to $2.6 billion during the last quarter, while Azure grew in the triple-digits.

But that’s only part of what’s going right at Oracle.

SaaS/PaaS margins have also been trending north — up 400 basis points to 56% during the last quarter. Oracle expects that metric to hit 57% by the end of FY17 and has set a long-term target of 80%, which compares favorably with gross margins by on-premise software.

On-Premise Software/Hardware Declines Muted

The trend in the past few years has been one where Oracle’s cloud growth has largely been offset by declines in on-premise software and hardware sales. New software license revenue declined 12% YoY to $2.7 billion, while software updates/product support revenue (driven by past deals) rose 3% to $4.8 billion.

Meanwhile, hardware revenue tumbled 9% YoY to $1.28 billion, mainly due to a weak server market and decreasing popularity of UNIX servers.

But the effects of falling on-premise software/hardware revenue are now beginning to become muted relative to cloud growth. After a turbulent period of multi-year revenue declines, Oracle expects to return to positive growth territory during the current quarter by posting 2% to 5% YoY growth in constant currency, with total software/cloud growth clocking in at 5% to 7% compared to 0% growth during the last quarter. Wall Street has projected for the company to post 2% growth in dollar terms.

This certainly looks like a turning point in Oracle’s fortunes and bodes well for ORCL stock. Oracle stock has badly underperformed the tech sector over the past five years, with ORCL stock piling on gains of 25.5% vs. 74% for the Technology Select Sector SPDR Fund (XLK).

Oracle stock appears cheap, trading at a price-earnings ratio of 19 vs. 26 for the software industry. With earnings projected to grow at 6.5% compounded annual growth rate over the next five years, Oracle stock looks like a good buy.

As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/06/oracle-stock-orcl-cloud-computing-earnings/.

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