Oracle Corporation: ORCL Earnings Will (Sadly) Probably Stay True To Form

Can ORCL rebound at the end of 2015? It's got a steep hill to climb.

Oracle Corporation (ORCL) reports fiscal second-quarter 2016 results on Wednesday, after market close. The enterprise software company finds itself at a defining moment in its corporate history as the emergence of cloud infrastructure and services forces a shift in strategy.

Oracle Corporation: ORCL Earnings Will (Sadly) Probably Stay True To FormTo date, this shift hasn’t worked in Oracle’s favor, and if the recent past is any indication, Q2 earnings may not be kind to ORCL stock. In fact, after missing consensus revenue estimates in five of the last six quarters, the company would need a surprise catalyst to impress shareholders for the quarter ended Nov. 30.

Let’s take a look at what Wall Street expects from ORCL on Wednesday, as well as a few of the variables that will determine how those numbers shake out:

Going Against AWS, Salesforce

Analysts expect ORCL to post revenue of $9.06 billion in Q2 2016, down 5.7% from the $9.61 billion it made in the year-ago quarter. Earnings per share are also expected to decline, falling from 69 cents to just 60 cents. The “whisper” number, or what Wall Street unofficially expects, is 61 cents.

The forced transition to the cloud is largely to blame for this secular decline in revenue. Oracle is essentially cannibalizing its own business, as its model shifts from licensing to a subscription-based cloud model.

The three core areas of the cloud biz are software as a service, platform as a service, and infrastructure as a service (SaaS, PaaS, and IaaS). ORCL has been trumpeting the rapid growth of its SaaS and PaaS offerings, areas in which Workday (WDAY) and Salesforce (CRM) also hold heavy weight. InvestorPlace Contributor Brian Nichols pointed out how growth in this field isn’t actually net growth:

“ORCL’s SaaS/PaaS revenue may be growing 34% to $451 million during its last quarter, but its much larger software licensing business declined 16% to $1.15 billion. Hence, Oracle takes from one business, gives to another, and then tells investors that its SaaS business is growing faster than Workday. While technically true, it is a bit misleading.”

Nichols also points out that Amazon.com (AMZN) has a firm grip on the IaaS area with Amazon Web Services. In fact, no one else is even close. Microsoft‘s (MSFT) Azure plays second fiddle to AWS, commanding 12% market share to AWS’s 29%, but when it comes to capabilities, AWS is unmatched:

“According to Gartner, AWS has 10 times more cloud server capacity than the next 14 largest public cloud service providers combined! AWS has five times the storage capacity of those same 14 competitors combined.”

ORCL is clearly caught playing catch-up here, and it’s doing so rather poorly. Founder and Executive Chairman Larry Ellison said he expects IaaS revenue to rise just 5% to 9% in the second fiscal quarter, while SaaS/PaaS revenues increase between 36% and 40%.

Of course, to what extent gains in these areas correspond to lost business in its bread-and-butter licensing segment remains to be seen, but judging by analyst expectations, that ratio is unlikely to work in Oracle’s favor, at least in the short-term.

Oracle earnings will also hinge on what Ellison and co-CEO Mark Hurd see for the fiscal third quarter. Wall Street is currently looking for EPS of 65 cents on revenue of $9.29 billion in Q3 2016, so guidance for anything less than that will be a disappointment.

Until the day Oracle actually becomes a leader in either SaaS/PaaS or IaaS, ORCL will remain a second-tier stock with a lot of ground to make up.

Tread carefully going into earnings.

As of this writing, John Divine was long shares of AMZN stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/12/oracle-earnings-orcl-stock-2/.

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