Oracle Corporation’s ORCL first-quarter 2017 results were unimpressive. Earnings (including stock based compensation) of 49 cents missed the Zacks Consensus Estimate by 4 cents. Revenues of $8.61 billion also lagged the Zacks Consensus Estimate of $8.72 billion. Shares fell 3.2% in after hour trading.
Earnings (excluding stock based compensation) increased 3.8% to 55 cents, which missed the company’s guided range of 56 to 60 cents. Revenue growth of almost 2% (3% in constant currency) was in line with the bottom-end of the management’s guided range of 2-5%.
Adverse currency movements impacted earnings by a penny and total revenues by 1% in the quarter, primarily due to the Brexit vote. Moreover, higher interest expense related to the large debt offering during the quarter hurt earnings by half a cent.
Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud revenues (11.4% of total revenues) soared 61.1% to $986 million in the reported quarter.
Cloud SaaS and PaaS revenues surged 80.3% year over year to $815 million better than the management guided range of 75% to 80%. IaaS revenues increased 7% to $171 million.
Oracle stated that SaaS and PaaS billings were up 49% on a year over year basis, much better than 38% in the previous quarter. The company added 776 new SaaS customers, of which 125 also bought PaaS. The company added 2,032 new PaaS customers. Installed base of PaaS and IaaS is now at 18,892 customers.
Strong cloud results fully offset weak on-premise software revenues (67.6% of total revenues), which declined 0.4% to $5.82 billion. Total cloud and on-premise software revenues grew 5.4% (6% on constant currency) to $6.81 billion.
However, hardware revenues continued to decline in the quarter. Total hardware revenues tanked 11.8% year over year to $996 million. Oracle’s engineered systems grew mid double-digit lead by Exadata that grew over 30% in the quarter.
Services revenues were also down 6.3% to $808 million.
Total operating expenses (including stock based compensation) as percentage of revenues increased 230 basis points (bps) to 64.2% in the reported quarter. The growth was primarily attributed to higher sales and marketing (S&M) expense, which increased 180 bps.
SaaS and PaaS gross margin was 60.9% significantly higher than 38.9% reported in the year-ago quarter.
Research & development (R&D) expense as percentage of revenues increased 120 bps on a year-over-year basis. General & administrative (G&A) expense increased 70 bps due to higher legal fees.
As a result, adjusted operating margin contracted 230 bps to 35.9%.
Oracle bought back 49 million shares for a total of $2 billion in the first quarter.
For second-quarter fiscal 2017, total revenue is anticipated to grow in the range of 0% to 3%. SaaS and PaaS revenue is expected to grow in the range of 78% to 82%. Software and cloud revenue, including SaaS/PaaS and IaaS, new software license and software support is expected to grow 3% to 5%.
Oracle expects lower G&A expense for the second quarter and minimum expense in the third quarter, due to the settlement of one case and end of two trials.
Earnings are anticipated to be between 59 cents and 62 cents for the quarter. Higher interest expense is expected to hurt earnings by more than a penny in the quarter.
For fiscal 2017, Oracle expects SaaS and PaaS revenue to cross the 67% growth rate (up from earlier guidance of 65%). Management also anticipates SaaS and PaaS gross margin to be higher than 62% by the end of fiscal 2017. The company’s expects this target to eventually rise to 80% in the long haul.
The first-quarter 2017 results clearly demonstrated that Oracle is gaining ground on its cloud endeavors. Specifically, the company’s offerings in SaaS and PaaS have gained significant momentum in the past few quarters.
The introduction of Generation2 IaaS data centers are expected to improve Oracle’s competitive prowess against Amazon.com AMZN. The new IaaS data centers are expected to provide significant cost and performance advantage over the Amazon Web Services.
Oracle continues to win new customers that include the likes of Adventist Health, Sachs, Tesco, Texas Instruments, UCLA Wake Forest University Baptist Medical Center, among others. We believe that the company’s growing cloud market share will continue to drive its top line in the foreseeable future.
However, for the last few months, the company has been embroiled in multiple lawsuits, which is an overhang on its financials. In May, Oracle lost its six-year old lawsuit against Alphabet GOOGL. This apart, the company is still undergoing a transition from licensing, to cloud subscription model, which will adversely impact its revenues in the near term.
Zacks Rank & Key Picks
Currently, Oracle has a Zacks Rank #3 (Hold). Infoblox BLOX is a better-ranked stock in the sector, sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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