To say Oracle Corporation (NYSE:ORCL) was a bit slow getting started with the transition to cloud computing offerings would be a considerable understatement. The database company missed the boat — the first one — altogether, and owners of Oracle stock have paid the price. ORCL shares have been hot and cold (less hot, and more cold) since 2014 on the heels of mostly stagnant revenue and earnings.
Over the course of 2016, however, CEO Larry Ellison seems to have seen the light, getting more serious about the cloud, and getting more serious about being competitive in it.
The only question Oracle shareholders have is, is it too late?
ORCL: Finally Making Rain With the Cloud
Although Oracle stock has generated some cloud revenue for a while now, it didn’t get serious about cloud services until three quarters ago. That’s when its information-as-a-service and platform-as-a-service revenue went from first gear to second gear … and never looked back.
It still has work to do in this space. As of the previously reported quarter ending in August, ORCL only generated $969 million worth of cloud-based revenue. That was a 58% year-over-year improvement for the division, but still only represented 11% of the company’s total revenue. The rest consisted of its traditional, on-site software licensing and hardware. It’s a start though.
Still, its cloud revenue was the only reason the company’s revenue grew during that first fiscal quarter of the year.
Part of that outperformance is by design. Ellison knows the cloud is the future, and he’s focusing on building that business and phasing out the rest.
However, part of that outperformance is a reflection of the changing market, and perhaps the core of the reason Oracle has made not one but two major acquisitions that may well let it play some much needed “catch up” in the space ORCL stock owners have been clamoring for.
The first of those deals is the purchase of internet performance and DNS solution provider Dyn. Details of the purchase of the privately held Dyb weren’t disclosed, but the benefit Dyn brings to Oracle’s table is clear. The target company is essentially a traffic helicopter, spotting bottlenecks on the internet and rerouting traffic as needed. It fits well with Oracle stock’s current offerings, since that in itself is a marketable service to companies that manage large, global networks.
The other game-changing acquisition ORCL stock holders have good reason to be excited about is the purchase of NetSuite — a $9.3 billion deal that closed in early November.
NetSuite — another cloud-based service like Dyn — gives enterprise clients tools like enterprise resources planning, customer relationship management and more. The addition of NetSuite to the Oracle family will give it something new to sell all over the world. Although it was and still is a popular service, its market was largely limited to English-speaking customers, and for some reason, Japan. ORCL already has a strong global presence, but doesn’t have anything quite like NetSuite in its armory right now.
At the same, the pairing gives NetSuite access to a deeper R&D bench.
Looking Ahead for Oracle Stock
It’s admittedly a less-than-ideal scenario for ORCL stock. Given the choice, Oracle stock holders would rather see the company develop its own cloud offerings from the ground up. Not only is that cheaper than acquiring new products and services, those new tools integrate seamlessly with existing platforms.
ORCL wasn’t given a choice, however. If it didn’t move big and move fast and instead opted to come up with home-grown solutions, it may end up losing more ground to competitors like Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN).
Still, the question remains — can Oracle grow its cloud business organically?
Thursday’s fiscal Q2 earnings report will offer a glimpse of an answer to that question, but only a glimpse.
As of the latest look, analysts expect the company to report a profit of 60 cents per share of ORCL stock on $9.12 billion worth of revenue. That bottom line would be a tad less than the year-ago profit of 63 cents per share, when the company drove $9 billion in sales.
A small part of those numbers will add the benefit of the addition of Dyn and NetSuite to the mix; each deal closed in the middle of November and the quarter in question didn’t come to a close until the end of last month.
In that light, the expected numbers are a bit disappointing.
Still, some observers think Oracle is accelerating its cloud business faster than most others realize. Jefferies analyst John DiFucci noted his channel checks were encouraging, with several deals that were pending as of the first quarter coming through in the second quarter. DiFucci is expecting Oracle to top its current estimates.
Whatever happens on Thursday, while current and would-be ORCL stock owners can look to the numbers for a hint of what’s to come cloud-wise, they should also know the transition is only in the fifth inning of a nine-inning game.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
