After blazing through the first nine months of 2017, Oracle Corporation (NASDAQ:ORCL) hit a wall. Up more than 37% heading into September’s Q1 2018 report, ORCL stock had a strong earnings beat prompting InvestorPlace’s Vince Martin to call it a “strong buy” worthy of investor attention.
Since that time Oracle stock has cooled off down 5% while the S&P 500 is up more than 7%. Oracle earnings for the second quarter were released Thursday after the market’s closed; the results were reasonably solid with only a couple of notable exceptions that are putting downward pressure on ORCL stock.
The Important Numbers
Overall, top-line revenues increased by 6% to $9.62 billion, beating the analyst estimate of $9.55 billion. On the bottom line, adjusted earnings were $0.70, 3% higher than the $0.68 a share expected by analysts and 14% higher than last year.
Oracle’s non-GAAP operating margin in the quarter was 44%, 200 basis points higher than Q2 2017. Geographically, revenues in the Americas, which account for 56% of its overall sales, grew by 9% from $4.51 billion in Q2 2017 to $4.90 billion this quarter.
Europe, Middle East and Africa (EMEA) rose 10% while the Asia Pacific region declined 3% in the quarter.
The company’s guidance for the third quarter looks encouraging with revenues expected to grow between 2%-4% with adjusted earnings of $0.68-$0.70 per share, about the same as Q3 2017, and below the analyst estimate of $0.72.
“Overall cloud revenue growth of 44% drove our quarterly revenue and earnings higher,” said Oracle CEO, Safra Catz. “Our success in the quarter was based on the increasing scale and the gathering momentum in our cloud business. I expect the business to continue to grow and strengthen over the coming quarters.”
The Cloud’s the Main Attraction
Reporting on Oracle’s Q1 2018 report, Vince Martin was impressed by the company’s efforts to grow its cloud revenues faster than even Oracle had projected.
“The message Hurd and Oracle were trying to give seems pretty clear. Oracle is back, and it’s a legitimate giant of its own in the cloud space, not a once-great on-premise software company trying to make a comeback,” stated Martin in September. “The figure [cloud revenue] totaled $1.5 billion in the quarter; just last year, Oracle set a goal of reaching $2 billion in cloud sales for the entire year.”
So, how did it do this quarter in the cloud?
Cloud revenues, which grew 51% in Q1, were up 44% in the second quarter to $1.52 billion excluding currency, making that $2 billion figure mentioned above seem conservative given Oracle’s smashed through it in just the first six months of the year.
The second exception to an otherwise healthy earnings report (the first being weak earnings guidance for Q3) analysts were expecting cloud revenues to be $30 million higher at $1.55 billion.
Bottom Line on ORCL Stock
While Oracle’s cloud business is snowballing it’s important to remember that it’s still a fraction — 16% of overall revenue in Q2 2018 — of what Microsoft Corporation (NASDAQ:MSFT) and some of the other big players in the cloud space are generating on an annual basis.
Furthermore, I don’t think ORCL stock is nearly as inexpensive as Martin suggests. The current PEG payback is 10.5 years, which puts it right smack dab in the middle of Microsoft and International Business Machines Corp. (NYSE:IBM).
Oracle’s second-quarter-earnings weren’t terrible by any stretch of the imagination, but given it’s a late entrant to the cloud battle, investors in the days and weeks ahead will likely be wondering about the company’s ability to compete in this space.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
