Oracle Corporation reported weak 3Q licenses but good SaaS & Paas Results, directionally as we expected. Total revenue decreased 3% Y/Y (+1% Y/Y in constant currency) to $9,014M, below our estimate of $9,075M and consensus of $9,124M. ORCL reported non-GAAP EPS of $0.64, a penny above our estimate of $0.63 and $0.02 above consensus of $0.62. Highlights included improved Asia- Pacific execution, while licenses and hardware disappointed, opines analysts at Wedbush.
See below for more analyst reactions to Oracle Corporation earnings.
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In light of the macro environment, we are pleased with Oracle’s 4Q:FY16 outlook and increasing our estimates accordingly, while raising our price target to $51.00 from $46.00. We believe the worst of this cloud transition is behind Oracle and our model indicates the company is past the trough in its operating profit cycle. In our view, Oracle offers investors the characteristics of a more defensive tech stock with the benefits of a rapidly growing cloud portfolio.
Oracle delivered a solid fiscal third quarter, topping non-GAAP EPS consensus by $0.02 (even as the currency impact came in $0.01 higher than expected) mainly due to a lower tax rate, although reported revenue was roughly $110 million below the Street. Looking ahead, Oracle guided fourth-quarter revenue slightly below consensus on as-reported basis and non-GAAP EPS roughly in line with consensus. For the third quarter, the cloud business was again the highlight, with gains in SaaS and PaaS billings (up a combined 32% year-over-year, as reported, with bookings up 77% year-over-year in constant currency) continuing at the expense of new on-premise software licenses (down 11% year-over-year in constant currency). We believe management is giving the salesforce strong incentive to shift customers to a SaaS model, which is driving stronger-than-expected gains in SaaS and PaaS bookings, but faster-than expected declines in the license business (and the hardware business).
Oracle Corporation – Cloud Transition – Is It Over Already? The good news, with SaaS/PaaS billings dollars starting to flow off the balance sheet and onto the income statement cloud margins are improving, gross margins are stabilizing and operating margin declines are moderating. The continuation of these trends puts Oracle firmly on track to return to EPS growth in FY17 – we model +3% YoY. The bad news, the income statement improvements look to come mostly from a slowing pace of migration to the cloud – the company’s own calculation of SaaS/PaaS billings growth has slowed significantly from 68% YoY last quarter to 32% in FY3Q16.
Oracle Corporation – Stifel
Overall, we expect Oracle’s accelerating cloud momentum to continue into Oracle’s seasonally strong F4Q16 and beyond given an increasingly competitive portfolio (both product depth and geographic reach), productive salesforce, growing pipelines, and referenceable customer base, and believe that cloud margins and FCF will climb higher in coming years. While license revenue growth remains muted given the cloud shift, high renewal rates and a growing maintenance stream (up 5% Y/Y-CC) should lead to low single-digit CC growth on the combined (license + maintenance) on-prem business. The bottom line is that Oracle’s cloud transition has been quite uneven over the past 1-2 years, but with this quarter’s solid results and forward guidance we expect sentiment to continue improving. Coupled with an attractive valuation, we remain buyers and raise our target price to $48.