When you say the word "cloud" 70 times during your earnings call, as Oracle Corp. (ORCL) (NYSE:ORCL) did in June, and make the strength of your cloud software/services transition the heart of your sales pitch to investors, those investors might not give you a pass if your cloud numbers fall a little short of expectations. Especially if your shares have risen 37% on the year amid signs of improved top-line momentum, and key rivals that only sell cloud offerings recently turned in strong reports.
That's where Oracle stands right now, as its shares trade fell after the close on Thursday and are down 3.3% in pre-market trading after the company delivered results and guidance that look pretty healthy at first glance. Oracle reported August quarter (fiscal first quarter) revenue of $9.19 billion (up 7% annually) and adjusted EPS of $0.62 (up 12%), beating consensus analyst estimates of $9.03 billion and $0.60. The numbers benefited a little from a 1% forex tailwind; Oracle had guided for forex to have no impact on revenue or EPS.
On the earnings call, co-CEO Safra Catz guided on a constant-currency basis for 2% to 4% revenue growth and adjusted EPS of $0.64 to $0.68 for the November quarter. But she added Oracle could see a forex tailwind of "as much as 3% positive on total revenue and $0.02 positive on EPS." After accounting for that, the guidance doesn't look as bad relative to a consensus for 4.7% revenue growth and EPS of $0.68.
But it's worth keeping in mind that many analysts probably weren't expecting that large of a forex boost. Also: With Catz suggesting Oracle will spend "significantly" more on stock buybacks than the $500 million it spent last quarter, buybacks will boost EPS.
More importantly, Oracle guided for its total cloud revenue growth -- boosted some by last November's $9.3 billion purchase of leading midmarket cloud app vendor NetSuite -- to be in a range of 39% to 43% in constant currency. Even after a forex boost, that suggests cloud sales are expected to fall short of a consensus of $1.58 billion (up 50%).
As it is, in spite of the healthy total revenue beat, Oracle's August quarter cloud revenue of $1.47 billion (up 51%) was just nearly in-line with a $1.48 billion consensus. Cloud app (SaaS) revenue grew 62%, to $1.07 billion, thanks to both organic growth and NetSuite. Cloud app platform (PaaS) and cloud infrastructure (IaaS) revenue grew 28%, to $400 million. That's a slowdown from the May quarter's 40%, but Catz and fellow co-CEO Mark Hurd insist growth would've been stronger if not for a backlog of orders Oracle is still in the process of deploying.
Aside from forex, better-than-expected sales for Oracle's traditional on-premise businesses drove the August quarter revenue beat. Total on-premise software revenue grew 2%, to $5.92 billion, beating consensus by $100 million. License revenue (hurt by the cloud shift) fell 6%, to $966 million, but beat a $924 million consensus; license update and product support revenue (fairly stable) grew 3%, to $4.95 billion.
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In addition, Oracle's other services businesses saw revenue grow 7%, to $860 million. And its long-pressured hardware business saw revenue drop 5%, to $943 million, better than the May quarter's 13% drop.
One area of concern: Oracle's mainstay database business saw total revenue (cloud plus on-premise) grow just 3%, a slowdown from the May quarter's 8% in spite of the tailwind the business has gotten from the launch of a non-cloud version of Oracle's 12c database earlier this year. With cloud database sales up 53%, on-premise database sales appear to be dropping amid stiff competition from Microsoft Corp.'s (MSFT) SQL Server database and ongoing adoption of rival cloud database offerings such as Amazon.com Inc.'s (AMZN) Aurora managed database service, which adds enterprise-class features on top of the open-source MySQL and PostgreSQL databases.
On the call, Larry Ellison promised Oracle would use its October OpenWorld conference to unveil a next-gen database that "does not require human beings either to manage the database or tune the database," and is able to use AI (everyone's favorite buzzword) to "eliminate most sources of human error" and deliver 99.995% cloud uptime.
It looks as if Oracle is responding to Amazon's attempts to undercut the company via a cheap managed database service by trying to cut operating costs for a self-managed solution. Amazon, which is making big AI investments in a number of fields, might counter in time. Meanwhile, Microsoft's upcoming SQL Server 2017 database provides a slew of machine learning services for data accessed by third-party apps, and will also be the first version of SQL Server to run on Linux servers.
Among the bright spots on Oracle's call: In spite of the cloud revenue guidance, co-CEO Mark Hurd disclosed cloud bookings rose over 40% last quarter (nearly matching the May quarter's 43%), and forecast growth will be as strong or stronger in the November quarter. He also disclosed Oracle's cloud ERP apps (not counting NetSuite) saw 156% sales growth, and its Fusion cloud human capital management (HCM) apps 96% growth.
But it's worth keeping in mind that a large chunk of this growth stems from clients migrating from on-premise app deployments to cloud deployments. Oracle's Fusion HCM growth may indeed be more than twice as fast as cloud HCM leader Workday Inc.'s (WDAY) 41% July quarter revenue growth, as Hurd noted, but Workday isn't cannibalizing on-premise revenue streams along the way.
And just after Hurd stated all of Oracle's cloud CRM solutions saw double-digit growth, Salesforce.com Inc. (CRM) CEO Marc Benioff tweeted out a chart showing that his company's 2016 share of the CRM software market (cloud and on-premise) grew to 18.1% in 2016, per research firm IDC. That was well above Oracle's 9.4% share (up slightly) and #3 SAP SE's (SAP) 7.2% share. Salesforce's July quarter sales were up 26%.
The wheels aren't by any means falling off Oracle's cloud business. Even with the headwinds presented by Salesforce, Workday, Amazon and others, the company still has a decent chance of delivering modest long-term revenue growth with the help of rising enterprise software spend and the potential for cloud subscriptions to let Oracle derive more long-term revenue from those clients who stay loyal to it. Growth just isn't quite as strong right now as investors want it to be with the stock above $50.