Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report:3Q18 Earnings Update
Prev. Ed.: Feb 1, 2018; Changes in Estimates & News Update
Firms’ Recommendations: Positive: 61.54% (16 firms); Neutral: 38.46% (10); Negative: 0% (0)
Prev. Ed: 19, 8, 0
Firms’ Target Price: $57.03(↑$0.96 from last edition; 18 firms) Firms’ Avg. Expected Return: 26.79%
Note: A flash update on 3Q18 earnings was done on Mar19, 2018
Note: Though dated Mar27, 2018, the data in the tables below are as of Mar23, 2018.
Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have accompanying spreadsheet model.
Note: We do not have access to firm reports presenting Sell rating on ORCL
Portfolio Manager Executive Summary
Oracle Corporation (ORCL)is one of the world's largest enterprise software companies.Total revenue was $37.90 billion in FY17.
Key factors for determining an investment strategy for Oracle are as follows:
- Oracle’s continued focus on cloud computing, business intelligence and big data is expected to drive top-line growth and profitability over the long term
- Oracle enjoys a dominant position in the enterprise software and relational database management system (RDBMS) market
- Strong liquidity helps Oracle to aggressively buyback shares as well as hike dividend
- Acquisitions have been a key growth catalyst
- Oracle faces significant competition from the likes of IBM,Microsoft, Intel, SAP AG and Salesforce.com
Of the26firms covering the stock, 16are bullish, while10are neutral. Target prices range from a low of $48.00 to a high of $65.00, with an average of $57.03.On an average, the firms expect a return of 26.79%from the stock.
Bullish Stance (Buy or equivalent outlook)– 16firms or 61.54% – These firms believe thatOracle’s business transition from licensing to cloud is accelerating, which is a positive. They believe that the company’s leadership position in the database market along with aggressive acquisition strategy will drive growth. Improvement in Oracle’s cloud revenues indicates that the strategies are effective. Apart from this, solid maintenance renewals and stable operating margins are additional positives. The recently acquired Aconex is expected to yield significant revenues from the next fiscal year, expanding the company’s presence further in the rapidly-growing cloud market. Additionally, the bullish firms noted that acquisitions like Textura, Opower, and NetSuite have aided the company to capitalize on growth opportunities in the mid-market. The company’s strong financial position with an impressive cash flow figure is anticipated to be a positive going forward. The firms believe that lower tax rates and forex benefits will boost margins.
NeutralStance (Neutral or equivalent outlook) –10firms or 38.46%-These firms believe that growing demand for Oracle’s cloud and infrastructure related solutions are tailwinds. A growing IT demand is another positive. However, the firms believe that cloud transition is taking longer. The firms seem to be disappointed by cloud revenue growth compared with its peers and the cloud guidance provided by management. They are apprehensive that this might create pressure on the bottom line in the near term, which might lead to a declinein operating margins and southward movement of earnings estimates.
Negative Stance (Sell or equivalent outlook)– 0 firms or 0.0%
Conclusion – Oracle’s leadership position in the database market, strong product pipeline, new product releases, improving operational efficiency, accretive acquisitions and strong liquidity are expected to drive the stock price, going forward. Also, the fact that the company’s cloud offerings are gaining traction is a major positive. However, increasing competition in the database market from newer technologies is a concern.
Mar28, 2018
Overview
Oracle Corporationwas founded in 1979 and is based in Redwood Shores, CA. The company globally develops, manufactures, markets, distributes and services database (core product) and middleware software and applications software. With the acquisition of Sun Microsystems in Jan 2010, the company began selling hardware products and services, primarily comprising computer server and storage products.
Key investment considerations as identified by thefirms are as follows:
Key Positive Arguments / Key Negative Arguments- Oracle continues to invest in Cloud to generate sustained long-term growth.
- The NetSuite acquisition has helped the company to improve its competitive position as a cloud applications provider.
- New 12cR2 database product will solidify its footprint in the database market as well as drive PaaS revenues.
- Accretive acquisitions are a positive.
- Strong cash balance helps the company to aggressively buy back shares and increase dividend pay-out.
- Aggressive investment on cloud transition is expected to weigh on operating margin.
- Competitive pricing pressure, small deal sizes and continued lengthy sales cycles could hamper license revenue growth in the near future.
- Intensifying competition in the database market from newer technologies is a headwind.
- IaaS investment will take time to generate revenues due to competition from Amazon Web Services and Azure.
Oracle sells its products and services primarily through subsidiary sales and service organizations, as well as through indirect channels such as original equipment manufacturers (OEMs), distributors, large account resellers (LARs), value added resellers (VARs), system integrators/implementers, consultants, education providers, online Internet service providers, network integrators and independent software vendors. The company’s customer base includes large businesses, government agencies, educational institutions and resellers.
For more information on the company, please visit itswebsite:
Note: Oracle’s fiscal year ends on May 31.
Mar 28, 2018
Long-Term Growth
Oracle’s long-term EPS growth is projected to be9.8%. The companyholds a prime position in the enterprise software and database management system (DBMS) market and the recently introduced 12cR2 product will boost its market share in the long haul.
Based on its numerous acquisitions over the past few years, Oracle is able to deliver a complete end-to-end software suite, which allows it to capture a larger portion of customers' IT spending. The bullish firms believe that Oracle will continue to pursue strategic acquisitions (infrastructure and cloud based apps) in order to look for further growth amid a slowing and maturing market.
Oracle is gaining ground in thecloud business as is evident from its recent performance. The software-as-a-service (SaaS) segment is expected to grow very strongly over the next few years as enterprises increasingly transition to the cloud. Oracle has introduced a number of Cloud Platform services in the recent past that will not only help personalize SaaS applications, which are currently in demand but also support easy migration of on-premise applications to Oracle Cloud. In addition, the company has also been expanding its portfolio by making some strategic acquisitions. The Netsuite acquisition will allow the company to strengthen its position in the cloud space.
Overall, we believe that the company’s new commercial offerings place it quite well in the cloud services market. Moreover, the cloud services offering has opened up a new source of recurring revenues (subscriptions), which is expected to improve visibility.
Moreover, the firms believe that gross margin should improve as Oracle shifts its hardware sales away from low-margin servers and storage toward high-margin engineered systems. The firms remain bullish on Oracle’s long-term ability to leverage its installed base into a hybrid cloud offering built on an unmatched technology stack across hardware, applications, middleware and database.
However, the company’s continuing transition from licensing, where revenues are recognized upfront, to a cloud subscription model, where it is realized over the years, will hurt its top line in the near term. Stiff competition, lawsuits and currency volatility remain additional concerns.
Mar 28, 2018
Target Price/Valuation
Provided below is a summary of target price and rating as compiled by Zacks Research Digest:
Rating DistributionPositive / 61.54%↓
Neutral / 38.46%↑
Negative / 0.0%
Avg. Target Price / $57.03↑
Digest High / $65.00
Digest Low / $48.00
No. of firms with target price/Total / 18/26
Key risks to achieving the target price include weakness in IT spending that could slow sales cycles, acquisitions that could prove difficult to integrate, open source solutions and other competitive solutions, which could lead to pricing pressure or market share losses and loss of key personnel.
Recent Events
On March 27, 2018, Oracle announced the worldwide availability of the first service Oracle Autonomous Data Warehouse Cloud, based on new Oracle Autonomous Database. It will enhance performance and comes with 50% reduced cost compared with Amazon Web Services. The autonomous service uses machine learning and ensures a secured solution.
In another press release, the company declared thatOracle CloudApplications was leveraged by Lorain County Community Collegeto boost efficiency, enhance enrollment and improve student success.
In another press release, the company welcomed the Federal Circuit verdict. Per the verdict, company won the lawsuit against Google.
OnMar 22, 2018, Oracle unveiled a next generation cloud campus in Austin, TX with a view to support increasing Oracle Cloud demand.
On Mar 21, 2018, Oracle won a contract from the Midwestern Higher Education Compact (“MHEC”). Easy access and discounts on Oracle Cloud will empower MHEC to embrace digital transformation. Additionally, Oracle HCM Cloud was selected by Ithaca College to manage staff and enhance faculty engagement, such that student success is ensured.
On Mar 20, 2018, Oracle announced availability of Java SE 10 (JDK 10). JDK 10 boasts of new features, including local variable types, the Java-Based JIT Compiler, to mention a few. Additionally, the company unveiled new artificial intelligence (AI) based capabilities and user experience enhancements within Oracle HCM Cloud to improve engagement and customize services.
On Mar 19, 2018, Oracle reported 3Q18 results. Highlights are as follows:
- Revenues grew almost 6% on a y/y basis to $9.776 billion.
- EPS of 83 cents increased 20.3% y/y.
On Feb 27, 2018, Oracle teamed up with Universal Tennis to propel innovation and growth of the Universal Tennis Rating System, with Oracle powered UTR.
OnFeb 22, 2018, Oracle unveiled the latest version of Network Charging and Control (“NCC”), a significant product in its digital monetization portfolio.
OnFeb 21, 2018, Oracle launched an advanced data training and marketing program to guide auto dealing agencies to better utilize data.
OnFeb 20, 2018, Oracle announced the acquisition of Zenedge, which will help it to secure important cloud deployed, on-premise or hybrid IT systems.
On Jan 23, 2018, Oracle announced addition of unique, low voltage networking management capabilities to its Utilities Network Management System.
OnJan 18, 2018, Oracle collaborated with Accenture to deliver Oracle’s cloud applications suit to West Midlands Police (“WMP”) for public safety implementation.
On Jan 16, 2018, adding to its line of purpose-built, point-of-service-solutions, Oracle launched the Oracle MICROS Compact Workstation 310 point-of-sale (POS) terminal. Launched at National Retail Federation (“NRF”) 2018, workstation 310 is a rugged, high performance workstation in a compact form factor.
On Jan 15, 2018, Oracle announced extension of its alliance with Samsonite Europe, following which the latter will integrate Oracle’s Order Broker Cloud Service to enhance customer experience. The company also announced that its Retail Xstore Point-of-Service was deployed by luxury retailer Chalhoub to enhance customer experience.
Revenues
According to the 3Q18 press release, Oracle’s revenues of $9.776 billion improved6% (2% in constant currency) y/y that was higher than management’s guidance of 2-4%.
Oracle’s top-line growth benefited from the ongoing cloud-based momentum. Total cloud revenues (16% of total revenue compared with 13% in the year-ago quarter) advanced 32% (29% in constant currency) to $1.57 billion.
Moreover, total cloud and on-premise software revenues increased 8% (4% in constant currency) to $7.98 billion. We believe that the company’s growing cloud market share will continue to drive top-line growth in the foreseeable future.
Provided below is a summary of revenues as compiled by Zacks Digest:
Revenues ($ in millions) / 3Q17A / 2Q18A / 3Q18A / 4Q18E / 2017A / 2018E / 2019E / 2020EDigest Average / $9,274.0 / $9,630.4 / $9,776.0 / $11,178.9 / $37,899.0 / $39,793.3↓ / $41,150.8↓ / $42,553.7↓
Digest High / $9,274.0 / $9,639.0 / $9,776.0 / $11,216.0 / $37,899.9 / $40,100.0 / $41,635.0↓ / $43,467.0↓
Digest Low / $9,274.0 / $9,630.0 / $9,776.0 / $11,153.1 / $37,897.8 / $39,755.0↑ / $40,782.0↑ / $42,037.0↑
Y/Y Growth / 2.9% / 6.2% / 5.4% / 2.2% / 2.3% / 5.0%↓ / 3.4%↓ / 3.4%↓
Q/Q Growth / 2.2% / 4.5% / 1.5% / 14.4%
Revenue Details
Cloud SaaS revenues advanced a significant 33% (31% in constant currency) y/y to $1.151 billion. Cloud PaaS and IaaS revenues surged 28% (24% in constant currency) to $415 million. On-premise software revenues (66% of total revenues compared with 67% in the year-ago quarter) increased 4% (flat at constant currency) to $6.4 billion reflecting continued higher attachment rates of software support and renewal rates.
Management stated that Fusion ERP and Fusion HCM soared 65%. Further, the next-generation autonomous database launched by Oracle, which is supported by machine learning, is now fully available and is a key catalyst for the company. Management believes that the new database will improve Oracle’s competitive position in the cloud against Amazon Web Services (“AWS”).
Software license updates and product support revenues were almost $5.027 billion, up 6% (1% in constant currency). On a combined basis, on-premise support and SaaS revenues were up 8%. Total hardware revenues slipped 3% (down 7% at constant currency) y/y to $994 million. Services revenues decreased 2% (6% at constant currency) to $796 million.
Guidance
For 4Q18, total revenues are anticipated to grow in the range of 1-3% and 0% to (2%) in constant currency. Cloud revenues including Software as a service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS) are expected to grow between 19% and 23% (17-21% in constant currency), much lower than 32% (29% in constant currency) reported in the last quarter.
Firms’ Outlook
Some of the bullish firms are of the opinion that SaaS, Paas and IaaS revenues that comprise cloud revenues as a whole are poised to witness strength in the coming years as cloud adoption sees greater traction.
Most of them believe that Oracle has one of the broadest and deepest cloud product portfolios across all layers of the cloud (SaaS/PaaS/IaaS/DaaS). These firms are confident of Oracle’s ability to attract new customers to its cloud offerings by shifting its massive installed base to the cloud going forward.
These firms believe that Oracle’s cloud-based Human Capital Management (HCM) product is well poised to win business as legacy PeopleSoft customers upgrade on-premise systems to cloud.The firms are optimistic about the long-term growth of the cloud segment. They also believe that the company has significant cross-selling opportunities between its different SaaS applications.
The firms remain optimistic regarding Aconex acquisition. It is likelyto yield significant revenues from the next fiscal year. Additionally, the bullish firms noted that acquisitions like Textura, Opower, and NetSuite have aided Oracle to capitalize on growth opportunities in themid-market.
According to these firms, Oracle’s plan to convert maintenance revenue stream into SaaS will boost top-line growth in the long haul. They propose that if maintenance revenues continue to grow, it will demonstrate Oracle’s failure in cloud transition of installed base.
The company’s acquisition of several cloud solution providers and the growing demand of Oracle’s cloud and infrastructure based offerings are positives. Impressive renewals of maintenance and strong financial position are the other tailwinds.
However, weak spending on hardware and software technologies is a bit of a concern per a few firms.
Please refer to the Zacks Research Digest spreadsheet on ORCL for more details on revenue estimates.
Margins
According to the 3Q18 press release, Cloud Software as a service margin came in at 67% as compared with 65% reported in the year-ago quarter. Cloud PaaS and IaaS margin came in at 35% as compared with 46% reported in the year-ago quarter.
Non-GAAP operating expenses, as percentage of revenues, decreased 140 basis points (bps) to 56.1%. The decline was due to lower hardware, Software license updates and product support and research & development expenses, which were down 10%, 17% and 2%, respectively.
As a result, non-GAAP operating margin expanded 100 bps from the year-ago quarter to 44%.
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 3Q17A / 2Q18A / 3Q18A / 4Q18E / 2017A / 2018E / 2019E / 2020EGross / 79.9% / 80.0% / 79.9% / 81.8% / 80.6% / 80.3% / 80.4%↓ / 80.6%↑
Operating / 42.5% / 43.6% / 43.9% / 46.4% / 42.7% / 43.9%↓ / 44.3%↓ / 45.0%↓
Pretax / 39.7% / 41.5% / 42.7% / 44.3% / 39.5% / 41.9%↑ / 42.0%↓ / 42.9%↓
Net / 31.1% / 31.1% / 35.9% / 35.5% / 30.5% / 33.0%↓ / 33.9%↑ / 34.6%↑
Firms’ Outlook
Some of the bullish firms are of the view that Oracle’s efforts to make the transition to the cloud has resulted in stable operating margins of late. High-margin cloud revenues are expected to comprise a larger portion of the revenues in the coming years as the cloud business matures and renewals become a greater portion of the topline, consequently improving margins further.
Please refer to the Zacks Research Digest spreadsheet on ORCL for detailed margin estimates.
Earnings per Share
Oracle reported non-GAAP EPS of83 cents in 3Q18, up 20.3% y/y.This can primarily be attributed to 6% (2% in constant currency) growth in revenues that was higher than management’s guidance of 2-4%.
Provided below is a summary of EPS as compiled by Zacks Research Digest:
EPS / 3Q17A / 2Q18A / 3Q18A / 4Q18E / 2017A / 2018E / 2019E / 2020EDigest Average / $0.69 / $0.70 / $0.83 / $0.94 / $2.74 / $3.09↑ / $3.34↑ / $3.59↑
Digest High / $0.69 / $0.70 / $0.83 / $0.96 / $2.74 / $3.11↑ / $3.49↑ / $3.83↑
Digest Low / $0.69 / $0.70 / $0.83 / $0.93 / $2.74 / $3.08↑ / $3.29↑ / $3.49↑
Y/Y Growth / 7.3% / 14.0% / 20.4% / 6.2% / 4.9% / 12.7%↑ / 8.3%↓ / 7.5%↓
Q/Q Growth / 12.2% / 12.6% / 18.6% / 13.6%
Guidance
For 4Q18, non-GAAP earnings are anticipated to be between 92 cents and 95 cents for the quarter, with a positive impact of couple of cents from favorable currency tailwind.
Firms’Outlook
Most of the firms believe that EPS will improve further as Oracle’s transition to the cloud accelerates in the rest of2018. Some of them believe that EPS growth will exceed revenue growth on higher margins.
Please refer to the Zacks Research Digest spreadsheet on ORCL for detailed EPS estimates.
Research Analyst / Radhika N PujaraCopy Editor / Tuhin Roy
Content Ed.
QCA / Aniruddha Ganguly
Lead Analyst / Awantika Poddar
Reason for Update / 3Q18 Earnings Update
Zacks Investment Research Page 1