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Oracle Calls Cloud Software Revenue Growth ‘Dramatic,’ But Q3 Mixed

The Big Daddy of business software, Oracle ( ORCL ) made it four consecutive quarters of shrinking year-over-year earnings, but the company posted a big increase in its cloud software and shares rose after-hours despite a slight revenue miss. For fiscal Q3 ended Feb. 29, the company late Tuesday said earnings per share minus items fell 5.9% from the year-earlier quarter to 64 cents. That nevertheless beat the 62-cent consensus estimate of analysts polled by Thomson Reuters. And Oracle stock was up 4% in after-hours trading, after its earnings release. Revenue fell 3% to $9.01 billion, where analysts had modeled $9.13 billion. Cloud software revenue, however, jumped 40% to $735 million, and would have been up 44% in constant currency. Oracle does a lot of its business outside the U.S., so it’s hurt more than most by the strong U.S. dollar. Oracle said its software-as-a-service and platform-as-a-service revenue jumped 57%. The third cloud software component, infrastructure-as-a-service, fell 2%. The legacy software developer is transitioning more of its business to the cloud, while still managing billions of dollars in traditional, on-premise enterprise software license sales, making for an often rocky transition. “Our Cloud SaaS and PaaS revenue growth rate accelerated to 61% in constant currency in Q3,” said Oracle co-CEO Safra Catz in the earnings release. “This dramatic revenue increase drove our non-GAAP SaaS and PaaS gross margins up to 51% in Q3 as compared with 43% in Q2. Our cloud business is now in a hyper-growth phase.” Oracle had closed up a fraction in Tuesday’s regular session. Rival Microsoft ( MSFT ), which does many things other than developing software, also rose a fraction and did enterprise software rival SAP ( SAP ), while cloud rival Salesforce.com ( CRM ) fell a fraction Tuesday.

Oracle Earnings: Can Rising Cloud Make Up For Legacy Fall?

Analysts expect Oracle ( ORCL ) to show a fourth consecutive quarter of year-over-year earnings and sales declines in its Q3 fiscal 2016 report after the close Tuesday. The business software giant rose 2.4% to 38.95 Friday, hitting a 3-month high and rising back above its 200-day moving average. Oracle stock fell 0.6% to 38.70 in the stock market today , holding above the 200-day. Oracle stock remains 14% off a more than one-year high set June 17, and nearly even with its 38.91 close on Dec. 16, right before its fiscal Q2 earnings release showed shrinking earnings and sales. That report sent the stock sliding to a 25-month low of 33.13 on Jan. 20. “The stock is down 1.1% since (fiscal 2016’s second-quarter) earnings, outperforming the S&P 500, down 4.0%, given the general rotation out of growth stocks into more value names like Oracle,” wrote Nomura analyst Frederick Grieb in a research note Thursday. “While metrics for cloud revenue growth have been solid, investors remain concerned by what the potential cost will be to the legacy business, as well as the potential impact to margins during the transition.” Meanwhile, Pacific Crest Securities says more business users expect to increase spending on software-as-a-service (SaaS) from Microsoft ( MSFT ) than any other vendor, followed by spending increases for Oracle, then rivals SAP ( SAP ), Salesforce.com ( CRM ) and others. Microsoft stock closed up 2% to 53.07 Friday, then advanced 0.2% on Monday. SAP gained 2.3% to 78.65 on Friday, tacking on 0.1% on Monday. Salesforce rose 1.3% to 71.63 on Friday, then climbed 0.8% on Monday, finding resistance at the 200-day line. Analysts expect Oracle’s legacy-software license sales to continue falling faster than increasing cloud-subscription sales will rise, at least in the short term. Those polled by Thomson Reuters now model total Q3 revenue down 2% from a year earlier to $9.13 billion, revised down from $9.28 billion, estimated when Q2 earnings were released. They see adjusted EPS of 62 cents, down 9% from a year earlier and down from the 65 cents they estimated three months ago for Q3. In a conference call with analysts after the Q2 release, CEO Safra Catz guided Q3 revenue to a $9.08 billion midpoint and earnings to a range of 60 to 63 cents per share minus items. Anticipating more acceleration of cloud revenue in the second half of the fiscal year for Oracle, Nomura’s Grieb said: “It will be important to make sure that the company is not losing share to the competition. Strong cloud growth rates supported the business until the steep license revenue declines in the last few quarters suggested that the company may not be successfully converting on-premise customers to the cloud. “Investors are concerned that Oracle is not only cannibalizing the on-premise license business, but also offering aggressive incentives to sign cloud customers.” Nomura maintains a buy rating with a 44 price target on Oracle. Aggressive discounting of subscription sales might be why Pacific Crest Securities analyst Brendan Barnicle found feedback from Oracle customers better than expected. “Even though cloud is lagging with existing customers, it is doing better with new customers and cloud revenue recognition on existing deals is likely to drive upside to cloud expectations,” Barnicle wrote in a research note Thursday. “Among SaaS vendors, Oracle showed well in the recent Pacific Crest CFO survey.” He added that feedback about on-premises “applications was surprisingly positive,” particularly in the installed base. “We had little feedback on the database and infrastructure businesses. As a result, we see upside to the Cloud SaaS and PaaS (platform-as-a-service) revenue expectation of $554 million and overall revenue expectation of $9.127 billion,” Barnicle wrote. “We are less confident on EPS upside. EPS consensus of 62 cents seems a bit high, so we expect in-line EPS.” Pacific Crest carries Oracle with a sector weight rating, akin to a hold rating. In his recent survey of CFOs, Barnicle said that 46% plan to increase SaaS spending in 2016 with Microsoft, followed by 26% with Oracle, 25% with SAP, 16% with Salesforce.com, and about 12% each with HubSpot ( HUBS ) and Paylocity ( PCTY ). Image provided by Shutterstock .

Oracle Earnings Ahead: Can Rising Cloud Make Up For Legacy Fall?

Analysts expect Oracle ( ORCL ) to show a fourth consecutive quarter of year-over-year earnings and sales declines in its Q3 fiscal 2016 report after the close Tuesday. The business software giant rose 2.4% to 38.95 Friday, regaining the ground lost since its last quarterly report in mid-December. Oracle stock was down a fraction in early trading in the stock market today . Oracle stock remains 14% off a more than one-year high set June 17, and nearly even with its 38.91 close on Dec. 16, right before its fiscal Q2 earnings release showed shrinking earnings and sales. That report sent the stock sliding to a 25-month low of 33.13 on Jan. 20. “The stock is down 1.1% since (fiscal 2016’s second-quarter) earnings, outperforming the S&P 500, down 4.0%, given the general rotation out of growth stocks into more value names like Oracle,” wrote Nomura analyst Frederick Grieb in a research note Thursday. “While metrics for cloud revenue growth have been solid, investors remain concerned by what the potential cost will be to the legacy business, as well as the potential impact to margins during the transition.” Meanwhile, Pacific Crest Securities says more business users expect to increase spending on software-as-a-service (SaaS) from Microsoft ( MSFT ) than any other vendor, followed by spending increases for Oracle, then rivals SAP ( SAP ), Salesforce.com ( CRM ) and others. Microsoft stock closed up 2% to 53.07 Friday. SAP gained 2.3% to 78.65, while Salesforce rose 1.3% to 71.63. Analysts expect Oracle’s legacy-software license sales to continue falling faster than increasing cloud-subscription sales will rise, at least in the short term. Those polled by Thomson Reuters now model total Q3 revenue down 2% from a year earlier to $9.13 billion, revised down from $9.28 billion, estimated when Q2 earnings were released. They see adjusted EPS of 62 cents, down 9% from a year earlier and down from the 65 cents they estimated three months ago for Q3. In a conference call with analysts after the Q2 release, CEO Safra Catz guided Q3 revenue to a $9.08 billion midpoint and earnings to a range of 60 to 63 cents per share minus items. Anticipating more acceleration of cloud revenue in the second half of the fiscal year for Oracle, Nomura’s Grieb said: “It will be important to make sure that the company is not losing share to the competition. Strong cloud growth rates supported the business until the steep license revenue declines in the last few quarters suggested that the company may not be successfully converting on-premise customers to the cloud. “Investors are concerned that Oracle is not only cannibalizing the on-premise license business, but also offering aggressive incentives to sign cloud customers.” Nomura maintains a buy rating with a 44 price target on Oracle. Aggressive discounting of subscription sales might be why Pacific Crest Securities analyst Brendan Barnicle found feedback from Oracle customers better than expected. “Even though cloud is lagging with existing customers, it is doing better with new customers and cloud revenue recognition on existing deals is likely to drive upside to cloud expectations,” Barnicle wrote in a research note Thursday. “Among SaaS vendors, Oracle showed well in the recent Pacific Crest CFO survey.” He added that feedback about on-premises “applications was surprisingly positive,” particularly in the installed base. “We had little feedback on the database and infrastructure businesses. As a result, we see upside to the Cloud SaaS and PaaS (platform-as-a-service) revenue expectation of $554 million and overall revenue expectation of $9.127 billion,” Barnicle wrote. “We are less confident on EPS upside. EPS consensus of 62 cents seems a bit high, so we expect in-line EPS.” Pacific Crest carries Oracle with a sector weight rating, akin to a hold rating. In his recent survey of CFOs, Barnicle said that 46% plan to increase SaaS spending in 2016 with Microsoft, followed by 26% with Oracle, 25% with SAP, 16% with Salesforce.com, and about 12% each with HubSpot ( HUBS ) and Paylocity ( PCTY ). Image provided by Shutterstock .