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Oracle Corporation’s (ORCL - Free Report) posted mixed second-quarter 2017 results. Although earnings (including stock-based compensation) of 55 cents per share were in line with the Zacks Consensus Estimate, revenues of $9.07 billion lagged the same.
Earnings (excluding stock-based compensation) decreased 3.2% to 61 cents, which was within the company’s guided range of 59 to 62 cents. Revenue growth of almost 1% (2% in constant currency) was slightly ahead of the bottom end of management’s guided range of 0–3%.
Adverse currency movements impacted earnings by a penny and total revenues by 1% in the quarter, primarily due to strong U.S. dollars. Further, the devaluation of the Egyptian currency in November negatively impacted earnings.
Following the results, shares fell 2.2% in after-hours trading. We note that Oracle’s gain of 11.85% is almost in line with the Zacks Computer Software Industry’s gain of 11.73% on a year-to-date basis.
Top-line Details
Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud revenues (12% of total revenue) soared 66.7% to $1.09 billion in the reported quarter.
Cloud SaaS and PaaS revenues soared 89% year over year to $912 million better than management guided range of 78% to 82%. IaaS revenues increased 6.1% to $175 million.
Cloud bookings were $377 million in the quarter. Oracle stated that SaaS and PaaS billings were up 39% on a year-over-year basis. The company added 1,082 new SaaS customers, 2,225 new PaaS customers and 2,148 IaaS customers. Installed base of PaaS and IaaS is now at 21,219 customers.
Strong cloud results fully offset weak on-premise software revenues (67.5% of total revenue), which declined 3.7% to $6.13 billion. Total cloud and on-premise software revenues grew 2.9% (4% on constant currency) to $7.21 billion.
However, hardware revenues continued to decline in the quarter. Total hardware revenues dropped 9.7% year over year to $1.01 billion. Oracle’s engineered systems grew mid-double digit lead by Exadata that grew over 30% in the quarter.
Services revenues were also down 2% to $844 million.
Operating Details
Total operating expenses (including stock-based compensation) as percentage of revenues decreased 10 basis points (bps) to 60.7% in the reported quarter. The decline can primarily be attributed to lower Software license updates and product support, hardware products and hardware support expenses in the quarter, which were down 60 bps, 90 bps and 30 bps, respectively.
SaaS and PaaS gross margin was 61% significantly higher than 43% reported in the year-ago quarter. IaaS gross margin was 37% lower than management’s expectation due to continued investments.
Research & development (R&D) expense as percentage of revenues increased 60 bps on a year-over-year basis. General & administrative (G&A) expense increased 20 bps due to higher legal fees.
As a result, operating margin (including stock-based compensation) contracted 20 bps from the year-ago quarter to 38.4%.
Oracle bought back 30 million shares for a total of $500 million in the second quarter.
Guidance
For third-quarter fiscal 2017, total revenue is anticipated to grow in the range of 3% to 5%. A strong U.S. dollar is expected to impact revenues by at least 1%. SaaS and PaaS revenue is anticipated to grow in the range of 82% to 86%. Software and cloud revenue, including SaaS/PaaS and IaaS, new software license and software support is expected to grow 4% to 6%.
Earnings are anticipated to be between 61 cents and 64 cents for the quarter, with a penny impact from adverse currency headwind.
For fiscal 2017, Oracle now expects SaaS and PaaS revenue to cross the 80% growth rate (up from earlier guidance of 67%). Moreover, management anticipates SaaS and PaaS gross margin to be higher than 61% by the end of fiscal 2017. The company’s expects this target to eventually rise to 80% in the long haul.
Finally, total capital expenditure for the fiscal year is expected to be in the range of almost $2 billion.
Our Take
Oracle continues to gain ground on its cloud endeavors. Specifically, the company’s offerings in SaaS and PaaS have gained significant momentum in the past few quarters, which improves its competitive position against salesforce.com (CRM - Free Report) and Workday. Further, the introduction of Generation2 IaaS data centers are expected to improve Oracle’s competitive prowess against Amazon.com (AMZN - Free Report) .
Oracle continues to win new customers that include the likes of Texas Instruments (TXN - Free Report) , Netgear and Berkshire Hathaway among others. We believe the company’s growing cloud market share will continue to drive its top-line growth for the foreseeable future.
However, the transition from on-premise licensing to cloud-based subscription business model will take some more time to complete, which will impact near term results. Moreover, higher investments on IaaS will affect gross margin expansion. Further, a strong U.S. dollar remains a headwind.
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Oracle (ORCL) Posts In-Line Q2 Earnings, Misses Sales
Oracle Corporation’s (ORCL - Free Report) posted mixed second-quarter 2017 results. Although earnings (including stock-based compensation) of 55 cents per share were in line with the Zacks Consensus Estimate, revenues of $9.07 billion lagged the same.
Earnings (excluding stock-based compensation) decreased 3.2% to 61 cents, which was within the company’s guided range of 59 to 62 cents. Revenue growth of almost 1% (2% in constant currency) was slightly ahead of the bottom end of management’s guided range of 0–3%.
Adverse currency movements impacted earnings by a penny and total revenues by 1% in the quarter, primarily due to strong U.S. dollars. Further, the devaluation of the Egyptian currency in November negatively impacted earnings.
Following the results, shares fell 2.2% in after-hours trading. We note that Oracle’s gain of 11.85% is almost in line with the Zacks Computer Software Industry’s gain of 11.73% on a year-to-date basis.
Top-line Details
Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud revenues (12% of total revenue) soared 66.7% to $1.09 billion in the reported quarter.
Cloud SaaS and PaaS revenues soared 89% year over year to $912 million better than management guided range of 78% to 82%. IaaS revenues increased 6.1% to $175 million.
Cloud bookings were $377 million in the quarter. Oracle stated that SaaS and PaaS billings were up 39% on a year-over-year basis. The company added 1,082 new SaaS customers, 2,225 new PaaS customers and 2,148 IaaS customers. Installed base of PaaS and IaaS is now at 21,219 customers.
Strong cloud results fully offset weak on-premise software revenues (67.5% of total revenue), which declined 3.7% to $6.13 billion. Total cloud and on-premise software revenues grew 2.9% (4% on constant currency) to $7.21 billion.
However, hardware revenues continued to decline in the quarter. Total hardware revenues dropped 9.7% year over year to $1.01 billion. Oracle’s engineered systems grew mid-double digit lead by Exadata that grew over 30% in the quarter.
Services revenues were also down 2% to $844 million.
Operating Details
Total operating expenses (including stock-based compensation) as percentage of revenues decreased 10 basis points (bps) to 60.7% in the reported quarter. The decline can primarily be attributed to lower Software license updates and product support, hardware products and hardware support expenses in the quarter, which were down 60 bps, 90 bps and 30 bps, respectively.
SaaS and PaaS gross margin was 61% significantly higher than 43% reported in the year-ago quarter. IaaS gross margin was 37% lower than management’s expectation due to continued investments.
Research & development (R&D) expense as percentage of revenues increased 60 bps on a year-over-year basis. General & administrative (G&A) expense increased 20 bps due to higher legal fees.
As a result, operating margin (including stock-based compensation) contracted 20 bps from the year-ago quarter to 38.4%.
ORACLE CORP Price, Consensus and EPS Surprise
ORACLE CORP Price, Consensus and EPS Surprise | ORACLE CORP Quote
Share Repurchase
Oracle bought back 30 million shares for a total of $500 million in the second quarter.
Guidance
For third-quarter fiscal 2017, total revenue is anticipated to grow in the range of 3% to 5%. A strong U.S. dollar is expected to impact revenues by at least 1%. SaaS and PaaS revenue is anticipated to grow in the range of 82% to 86%. Software and cloud revenue, including SaaS/PaaS and IaaS, new software license and software support is expected to grow 4% to 6%.
Earnings are anticipated to be between 61 cents and 64 cents for the quarter, with a penny impact from adverse currency headwind.
For fiscal 2017, Oracle now expects SaaS and PaaS revenue to cross the 80% growth rate (up from earlier guidance of 67%). Moreover, management anticipates SaaS and PaaS gross margin to be higher than 61% by the end of fiscal 2017. The company’s expects this target to eventually rise to 80% in the long haul.
Finally, total capital expenditure for the fiscal year is expected to be in the range of almost $2 billion.
Our Take
Oracle continues to gain ground on its cloud endeavors. Specifically, the company’s offerings in SaaS and PaaS have gained significant momentum in the past few quarters, which improves its competitive position against salesforce.com (CRM - Free Report) and Workday. Further, the introduction of Generation2 IaaS data centers are expected to improve Oracle’s competitive prowess against Amazon.com (AMZN - Free Report) .
Oracle continues to win new customers that include the likes of Texas Instruments (TXN - Free Report) , Netgear and Berkshire Hathaway among others. We believe the company’s growing cloud market share will continue to drive its top-line growth for the foreseeable future.
However, the transition from on-premise licensing to cloud-based subscription business model will take some more time to complete, which will impact near term results. Moreover, higher investments on IaaS will affect gross margin expansion. Further, a strong U.S. dollar remains a headwind.
Zacks Rank & Key Picks
Currently, Oracle has a Zacks Rank #3 (Hold). Texas Instrument is a better-ranked stock in the broader technology sector sporting a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
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Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>