Why Oracle Doesn't Seem to Be Getting a Pass for Weak Cloud Guidance This Time
Oracle co-CEO Mark Hurd

Though Oracle (ORCL) issued weak cloud revenue guidance in December, markets curiously chose to give the enterprise software giant a pass: After dropping 3.8% the day after the outlook was issued on Oracle's earnings call, shares rebounded in January and went into the company's latest earnings report 4% above where they traded prior to the last one.     

Following the release of another weak cloud outlook on Monday, Wall Street appears to be less willing to quickly forgive and forget -- particularly since the guidance contrasts sharply with the numbers provided by so many of Oracle's peers.

As of the time of this article, Oracle shares were down almost 9% on Tuesday to $47.33. They're now roughly flat on the year.

Oracle reported that adjusted February quarter (fiscal third quarter) revenue of $9.78 billion (up 5% annually) and adjusted EPS of $0.83. EPS, boosted by nearly $4 billion worth of stock buybacks and a lower-than-expected 16.1% tax rate, easily topped a $0.72 consensus. But revenue was only in-line and would have missed consensus if not for a larger-than-expected four-percentage-point boost from currency swings.

Oracle also guided on its earnings call for May quarter revenue to be up just 1% to 3% annually in dollars, and flat to down 2% in constant currency (CC). The midpoint of the guidance range is slightly below a consensus for 2.6% dollar-based growth. In addition, cloud revenue growth is forecast to slow to 19% to 23% (17% to 21% in CC) from last quarter's 32%; consensus was for 28% growth.

As it did in March, Oracle tried hard to blame its weaker-than-expected cloud outlook on its introduction of a bring-your-own-license (BYOL) option for Oracle databases and certain other products. By allowing companies to buy traditional software licenses and later make use of them on Oracle's cloud infrastructure if they wish, BYOL -- already supported by Microsoft (MSFT)  and Amazon's (AMZN) rival cloud infrastructure platforms for certain databases -- has the effect of boosting Oracle's license revenue but depressing its cloud revenue.

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However, BYOL only impacts Oracle's cloud app platform (PaaS) revenue. It has little to no effect on Oracle's cloud app (SaaS) revenue, which accounted for 73% of total February quarter cloud revenue. With Oracle no longer getting a boost from the timing of its $9 billion NetSuite acquisition (it closed in Nov. 2016), SaaS revenue growth slowed to 33% in the February quarter (slightly below consensus) from 55% in the August quarter. And it looks like growth will slow meaningfully again in the May quarter.

Moreover, co-CEO Mark Hurd was slightly less forthcoming about sharing SaaS figures on Oracle's Monday call than he was on its December call. Though noting that Oracle saw 62% organic growth for its cloud ERP apps (this appears to exclude NetSuite) and 71% growth for its Fusion cloud human capital management (HCM) apps, he didn't share growth rates for Oracle's cloud CRM apps or total SaaS bookings. Regarding the latter, Hurd only said that Oracle's SaaS bookings annualized recurring revenue (ARR) was "roughly where I expected it to be."

By comparison, in December, Hurd disclosed that Oracle's SaaS bookings rose 42% annually in the November quarter, and that its cloud CRM offerings saw double-digit growth.

SaaS wasn't the only weak spot in Oracle's report. In spite of the BYOL program, new software license revenue (drives future product support revenue) fell 2% annually to $1.39 billion, missing a $1.42 billion consensus. Hardware revenue, which has long been pressured, fell 3%, and Services revenue (excludes product support) fell 2%.

On the bright side, PaaS and cloud infrastructure (IaaS) revenue managed to grow 28% to $415 million, slightly beating consensus estimates. Likewise, license update and product support revenue was a little better than expected, growing 6% to $5.03 billion.

If IT spending conditions were weak, Oracle could be given a pass for its SaaS and software license pressures. But as Hurd himself noted during a recent Goldman Sachs conference talk, conditions look pretty good right now. A long list of enterprise hardware, software and services firms have delivered upbeat earnings reports since January.

Included on this list are major Oracle SaaS rivals such as CRM software giant Salesforce.com  (CRM) and HR/financials giant Workday (WDAY) . Microsoft, which has seen its Azure cloud platform, SQL Server database business and mid-market Dynamics cloud apps business (it competes against NetSuite) all perform well, is also on it. So is, in a way, Amazon, which reported its AWS revenue rose 45% annually in Q4.

It's not all doom and gloom for Oracle. As signaled by Hurd's comments, some parts of its SaaS business seem to be performing well. And its broader database business, which saw 6% growth last quarter and will get a boost later this year from the wider availability of Oracle's recently-launched 18c database, is faring reasonably well.

But it's hard to ignore the fact that the company's total revenue growth is markedly below that of major peers. And that at least some parts of a SaaS business that Oracle has gone to great lengths to trumpet seem to be facing stiff competition.

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