When the database leader Oracle Corp. (ORCL, Financial) reported its first-quarter numbers of fiscal year 2015, it did raise several eyebrows as the results were dim enough to worry investors. Both the top and bottom line failed to meet the analyst consensus. Along with the earnings release the company also declared a shuffle in its top management roles which left investors agape. So did all this mean that Oracle’s future is unpredictable and overcast with dark clouds? Or is there still a silver living? Let’s dig in further to get to the answer. But before that, a quick quarter recap is essential. So, here we go.
A quick quarter recap
The results trailed consensus estimates with revenue standing at $8.6 billion, against the analysts’ estimate of $8.77 billion. This represented a year-on-year growth rate of 3%, lower than the quarterly guidance of 4% to 6%. Cloud revenues registered robust growth while sales from new software licenses and hardware products declined on a year-on-year basis. Software and cloud revenue grew 6% to $6.6 billion while hardware systems revenue dropped 8% to $1.2 billion.
The company’s quarterly earnings per share stood at $0.62, towards the lower end of the guidance and below the analyst estimates of $0.64 per share.
Against the backdrop of such bleak numbers, the company has announced its plans to “roll out” a database cloud service sometime this week. Also, Oracle declared that Larry Ellison would step down as CEO and would be replaced by Safra Catz and Mark Hurd.
The new CEO stated, “We are increasing our cloud services growth rate while simultaneously delivering record levels of cash flow … In Q1, our overall cloud services business grew more than 30% to $475 million in revenue. At the same time, we delivered an all-time record operating cash flow up 7% to $6.7 billion. We are laser focused on two goals: growing our cloud business and growing our cash flow. We’re off to a good start in FY15.”
To further soothe worried investors, the Board of Directors also declared a quarterly cash dividend of $0.12 per share which would be paid to stockholders of record as of the close of business on October 8, 2014, with payment date of October 29, 2014. The company has also declared the repurchase of an additional $13 billion of common stock under the existing share repurchase program in the future quarters.
So, as the company is generating enough cash to pay its investors, does this mean that the future quarters will reveal the silver lining within the black clouds…? What are the promising factors which can create a difference in the upcoming quarters…? Let’s check that out now.
Cloud business taking the company to Cloud 9
Oracle cloud revenue totalled $475 million, from $363 million in the first quarter of 2014. The Software-as-a-Service (Saas) and Platform-as-a-service (PaaS) revenue were up by 32% to $337 million. Also, Infrastructure-as-a-service (IaaS) sales which competes with Amazon’s (AMZN, Financial) Web services was up 26% from last year at $138 million. And the best part in the quarter was that total cloud revenue rose 32% in dollar terms which was twice the last year’s growth rate.
Larry Ellison said, “We added more ERP customers in the Cloud this past quarter than Workday (WDAY, Financial) has had in the life of their company.” The company reported 54% growth in bookings this quarter, with bookings from Oracle Fusion apps, Enterprise Resource planning, Human Capital Management and Sales Force Automation growing triple digits in the quarter.
And the management has also expressed an interest in driving this revenue chart further upwards in the quest of becoming the number one in the cloud line of business. SaaS and PaaS sales for the second quarter of 2015 are expected to improve between 39% and 44% on a constant currency basis. Similarly the IaaS revenue is expected to grow at a rate between 40% and 44% for the next quarter. Thus, such accelerated growth in the future quarters should be able to increase the run-rate manifold for the cloud business annually.
Saas adoption and engineered systems provide the boost
Saas helps customers to reduce their capex as they don’t need to buy huge hardware and can mitigate their operating expenses since they don’t have to maintain the hardware or update the software. The management presumes that, while the customers are paying more to Oracle to adopt to Saas, at the same point of time this increase is offset by the reduction in the cost associated with implementation and running of their own systems.
Also the engineered systems line of business has grown having generated around $3 billion over the lifetime of the product. During the quarter, Oracle reached the milestone of shipping the 10,000th engineered system. Also this segment which represents a third of the company’s hardware sales, grew by double digits this quarter. The top brass boasted that while rival’s numbers were declining double digits, Oracle was witnessing double digit growth in the segment.
Database Cloud service to aid in luring customers
At Oracle OpenWorld 2014, Oracle will roll-out its new Database Cloud service, a multi-tenant database-as-a-service offering that would allow customers to move all their existing apps and databases to the cloud by just a “push of a button”. Data will be encrypted for secure and efficient transfer to the cloud without any reprogramming needs.
Thus Oracle is moving from just selling software to customers- to hosting and maintaining their software on the cloud, providing storage and passing along savings to the customers. Ellison said- “The promise is for Oracle to be a much larger and much more profitable and much more critical supplier to our customers, a much more strategic supplier to our customers…Database is our largest software business and database will be our largest cloud service business.”
To conclude
The top notch in the company remains active in making appropriate strategies for building their business and growing their numbers in the long run. Even in the quarter, though revenue and earnings missed analysts’ estimates, the company generated strong cash flow numbers to reward its investors. The company stays inclined on growing customer trust which forms the foundation of its success story. So, with the new upcoming event in Oracle’s financial calendar, one thing is sure – investors stand to gain by holding the stock on the long term perspective.
