Oracle Corporation (NYSE:ORCL) printed a compelling headline to announce its fiscal second-quarter numbers, boasting 81% growth with its all-important cloud computing division. Yet investors sold off ORCL stock by a couple percent after the bell nonetheless.
Maybe that’s because of what was left unclear: How much of that growth was organic, and how much of it was driven by acquisitions.
Oracle earned 61 cents per share on revenue of $9.1 billion last quarter. The former figure was down from 63 cents per share of Oracle stock in the year-ago quarter, but a penny better than expectations. The latter figure was slightly better than Q2 2015’s $9 billion … but about $16 million shy of estimates.
Said founder and Chief Technology Officer Larry Ellison:
“Our Database as a Service cloud revenue was $100 million for the quarter, driving growth in our overall database business. We expect our Database as a Service and IaaS businesses will grow even faster than our skyrocketing SaaS business. A lot of people were taken by surprise when IDC ranked Oracle #1 in Enterprise SaaS, surpassing salesforce.com and overcoming their fifteen year head-start. Stay tuned. More surprises coming. I think we’re going to do even better with IaaS and the Oracle database in the cloud.”
The 2.4% dip from ORCL stock following the post-close reports says the Oracle earnings report and Ellison’s thoughts didn’t quite resonate with investors.
While Oracle became in icon in the late 1990s during the advent of the internet, the database company has struggled to stay relevant during the rise of cloud computing. Rivals like Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN) have stepped into the data-management role Oracle once played for most of the globe’s major businesses.
ORCL has been playing catch-up, though.
Beginning late last year, Oracle turned up the heat on its IaaS (information-as-a-service) and PaaS (platform-as-a-service) business, growing its revenue from $611 million during the first fiscal quarter of 2016 to $969 million in the first quarter of fiscal 2017. For the recently completed second quarter reported today, the company drove $1.05 billion worth of cloud-based revenue. That was a 62% improvement on last year’s cloud business.
Its more traditional hardware and software divisions continue to struggle, however. Hardware sales fell 10%, while on-site software revenue was off 4%.
CEO Mark Hurd aims to continue growing the company’s cloud business, but not entirely organically. In November, Oracle closed not one but two different acquisitions that will make it more competitive in the cloud market.
One of those was the deal to buy privately held Dyn. The target company monitors the world’s web activity, identifying traffic bottlenecks and cyberattacks and re-routing web traffic as needed to ensure a company’s website and networks always function optimally. The addition of Dyn works will with Oracle’s other services and platforms, since Dyn is managed on the cloud, with a web-based interface.
ORCL stock owners, however, are even more excited about the November acquisition of NetSuite.
With a price tag of $9.3 billion, the deal didn’t come cheap. Indeed, NetSuite isn’t profitable now, and never has been. But revenue is ramping up quickly for the provider of cloud-based enterprise resources planning tools and customer relationship management tools, which makes it competitive with Salesforce.com, Inc. (NYSE:CRM). With a few tweaks by Oracle, NetSuite could become not only a business-building tool, but even a profit center in and of itself.
Helping to lead NetSuite to profitability will be a scale it’s never been able to achieve on its own. Though an impressive service, NetSuite was never marketed to non-English speaking markets, with the odd exception of Japan. Under the Oracle umbrella though, NetSuite will be introduced to all the worldwide markets Oracle currently serves.
The acquisition will also offer NetSuite access to Oracle’s bigger (and faster) development team.
As expected, the big acquisition crimped margins even though it bolstered the top line. Net income slumped to 23% of revenue, down from 24% in fiscal Q2 of the prior year. Oracle owners should bear in mind that only about one month of the three that made up the quarter in question reflected the costs and benefits of both deals.
The purchase of NetSuite also shook up the balance sheet rather well. As of the end of last quarter, total debt was at $50.5 billion, well up from the $40.1 billion worth of debt on the company’s books a year earlier. That higher debt level is mostly the result of the NetSuite purchase.
Looking Ahead for ORCL Stock
Oracle didn’t offer specific guidance for the quarter or year currently underway, but it did provide an outlook for the more important elements of revenue mix. Hurd explained:
“We expect to book over $2 billion in new annually recurring cloud business this year alone. And, with the acquisition of NetSuite, we plan on being the #1 cloud applications service provider for companies with less than 1,000 employees as well.”
Analysts had been calling for a profit of 65 cents per share on sales of $9.25 billion for the quarter underway. Both would be better than year-ago earnings and revenue, though not by much. The company reported earnings of 64 cents per share of ORCL stock a year earlier, when it drove $9.01 billion worth of sales.
While it was and will continue to be measurable progress from Oracle, it’s still not clear to what extent — if any — Oracle can muster some much-needed net organic growth.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.