It looks like 2016 might go down as the year Oracle Corporation (NYSE:ORCL) made the market a believer in its epic transition to the cloud. Oracle stock is up and can keep heading that way … but only if earnings show show the kind of momentum they did three months ago.
Oracle has been turning itself into a cloud-based services company for what feels like forever. It has been a long, pricey and high-risk process. It’s one that has kept Oracle stock rangebound for roughly two years.
But, like too many other old-line Silicon Valley names … well, it’s not like ORCL really has a choice.
Businesses don’t want to buy software to run on their own hardware. They don’t want their own hardware and software to deal with; it’s an expensive headache. Customers would rather pay for the right to access the services they need on someone else’s network of servers and digital spaghetti. It’s just too easy and cost effective to forego.
As we’ve mentioned before, transitioning away from software licenses to cloud services requires a vast investment in data centers, for one thing. Companies also are required to recognize revenue over the life of the contract.
That can help smooth out revenue, but it also means no more big bumps from landing a big software sale.
This helps explain why ORCL’s revenue has so frequently missed Wall Street estimates. To be sure, the cloud services business is delivering strong growth. It’s just that revenue from the the old way of doing things — software licensing — falling faster than it can be replaced by the cloud.
ORCL Kicks Off a Pivotal Fiscal Year
It’s not unlike the problem newspapers have with their print and online businesses. Little wonder, then, that it has made for some messy results. Fortunately for anyone holding Oracle stock, there is light at the end of the tunnel. That is, if ORCL can start the new fiscal year as well as it capped of the last one.
For the fiscal first quarter, Wall Street expects Oracle earnings to come to 58 cents a share, up from 53 cents a share last year, according to a survey by Thomson Reuters. Revenue is forecast to rise 3% to $8.7 billion.
The key, as it was last quarter, will be margins. The market wants more than customer growth. It wants to see consistent margin expansion. After all, higher profitability for all involved is the cloud’s single-biggest selling point.
That’s how Oracle met analysts’ average estimate last quarter and should be poised to do so (at the least) again. Importantly, revenue actually exceeded the Street’s forecast last time around. Indeed, before Q4, ORCL had missed analysts’ estimates in six of the previous seven quarters.
As long as the Street maintains its usually conservative view, Oracle has a good chance to deliver better-than-expected top-line figures once again. The company’s relatively new “click to accept” model makes it easy to get up and running on ORCL products, and they really seem to like it.
Whether Oracle can continue to do well internationally will be of particular interest. That’s not just because of what it means for the company specifically, but as a bellwether the business-tech sector as a whole.
Oracle stock is about 10% higher for the year-to-date, which easily outpaces the broader market. As long as Oracle earnings Thursday deliver more of the same steady progress, ORCL looks like it will keep being an outperformer.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
