Oracle’s Earnings Preview: Can New Technology Help Oracle Achieve Its Cloud Growth Target?

Leading software company Oracle (NYSE:ORCL) is all set to release its Q2’17 earnings on December 15th. (Fiscal years end with May.)  The company’s revenues have been pretty much flat since 2012, at around $38 billion, due to a decrease in demand for the on-premise new software licensing business and a minor 1.5 percentage point decrease in share in the database market, which is their primary product. However, Oracle’s Cloud business has been making up for the lost legacy business as most new customers and some existing on-premise customers shift their operations to the Cloud. Yet the company’s on-premise support revenues have stayed strong, sustaining a roughly 4% compounded rate of growth since 2012.  Many large enterprises continue to continue to invest in upgrades and support for data base infrastructure on premise. In Q1’17, Oracle’s quarter-to-quarter revenue gain in Cloud revenues was able to surpass the comparable-period decline in sales of its legacy business by a margin of $147 million.

We are eager to see how Oracle plans its journey towards an annualized run rate of $10 billion in Cloud revenues, to be generated in both SaaS & PaaS (Software- and Platform-as-a-Service) sales.  Its primary competitor in this goal, Salesforce.com (NYSE:CRM), has already guided for $10 billion SaaS & PaaS sales in 2018, and with $8.0 billion in revenues it is clearly much closer to this goal. In contrast, Oracle’s estimated CY’16 SaaS & PaaS revenue are around $3 billion and its revenue will have to grow at 84% CAGR to reach the same milestone by 2018. The task might not be impossible as Oracle has already guided 78% to 82% year-over-year growth in this division for Q2’17. The other two important developments in Q2, which could have a positive impact on the company’s performance in the quarter, were:

1. Launch of IaaS generation 2 data centers along with Oracle Database 12c version 2.
2. Completion of NetSuite and Dyn Acquisition.

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Can Oracle’s New Technology Help It To Gain The Market Share And Revenue Acceleration?

• Oracle announced the second release of its 12c Database on cloud with the introduction of Oracle Exadata Express Cloud Service in September.
• This has been an attempt to shift Oracle’s database customers from Amazon Web Services (AWS) to Oracle’s cloud platform as the company’s chairman Larry Ellison claims that the performance and efficiency of Oracle’s database increases manifold on Oracle’s cloud, than on AWS ^[1].
• Moreover, the company claims to have built second generation IaaS data centers as opposed to the industry leader Amazon’s (NYSE:AMZN) first generation infrastructure.
• Oracle is far from posing any serious competition to Amazon in cloud infrastructure services as the latter has reported over $11 billion trailing-twelve-month AWS revenues in comparison to Oracle’s less than $1 billion IaaS revenues. However, it will be worth noting if these new technologies can help boost Oracle’s revenue and expand its customer base in Q2 and beyond.

NetSuite And Dyn Acquisition Completed In Q2: But Benefits Might Be Limited In Q2  Results

• In November, Oracle completed the acquisition of leading Cloud ERP player NetSuite for $9.3 billion.
• NetSuite’s revenue have grown at over 30% in the past and stood at $741 million in 2015. NetSuite had guided for over $900 million revenues in 2016 before the acquisition, which in future is likely to benefit Oracle’s SaaS & PaaS division.
• Oracle also acquired cloud based internet performance and Domain Name System (DNS) provider Dyn on November 21st at an undisclosed price. The deal is being estimated at over $600 million ^[2].
• As both these acquisitions were completed in November, the benefit from them realized in Q2 might be very limited.

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1. Oracle Beats AWS in Head To Head Cloud Database Comparison [↩]
2. Why Oracle Paid More than $600 million for Dyn [↩]