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Two Reasons Oracle Corporation (NYSE:ORCL) Strong Quarter Was Sold on Tuesday

Oracle Corporation (NYSE:ORCL) opened sharply to the upside on Tuesday after reporting Q2 (Nov) earnings results on Monday afternoon.

Shares rolled over later in the day as the broad market took another clobbering in what is beginning to feel more and more like a bear market environment.

Oracle Corporation (NYSE:ORCL) is in the business of enterprise software, putting out products that help corporate customers optimize operations in IT, platform, and technology infrastructure. The company does also push out some hardware products and is a big player in cloud services.

The cloud licensing enterprise products side of the business accounts for about 82% of its overall sales for this fiscal year. This is basically Oracle Cloud Services offerings, cloud license and on-premise license offerings, and license support offerings.

The services side of the business is about 8% of the pie, while hardware accounts for about 10% and competes in storage and server technology along with some niche stuff.

The company has generally been sliding its investment increasing toward the development of more cloud enterprise products, with SaaS, PaaS, and IaaS revenue taking up the lion’s share of strategic planning and targeting.

The company made clear that this is a long-term process and will continue.


So, How Did it Go?

Turning to the Q2 (Nov) results, non-GAAP EPS rose 16% year/year to $0.80, which was better than prior guidance of $0.77-0.79. Non-GAAP revenue was roughly flat year/year at $9.57 bln, which was at high end of prior guidance of -2% to flat. Non-GAAP operating margin was flat year/year at 43%.

On the call, Oracle guided for Q3 (Feb) non-GAAP EPS of $0.83-0.85, which was basically in-line with what investors expected. The company’s cloud segment is what folks are paying most attention to, and it did better than expected overall. Expectations were pretty low and the company vaulted over them.

Cloud Services and License Support plus Cloud License and On-Premise License revenues were up 1% to $7.9 bln. Cloud Services and License Support revenues were $6.6 bln, while Cloud License and On-Premise License revenues were $1.2 bln.

Management was ebullient on the call on this note, stating that “cloud had a spectacular quarter”.

Overall, Oracle’s Enterprise Resource Planning (ERP) and Human Capital Management (HCM) solutions now have annualized SaaS revenue of $2.6 bln, representing growth in the mid-20% range. Revenue growth for the company’s Fusion Applications suite was 34% while revenue growth for Fusion ERP was 44% organically.

“Oracle’s two cloud ERP businesses, Fusion ERP and NetSuite ERP, delivered a combined revenue growth rate of 32% in Q2,” said Oracle CEO, Mark Hurd. “With nearly 6,000 Fusion ERP customers and over 16,000 NetSuite ERP customers, Oracle is the clear leader in cloud ERP.  ERP has always been the largest segment of the enterprise applications business, so we have lots of room to grow as customers migrate from their traditional on-premise ERP to the Oracle Fusion ERP Cloud.”

The company also added some key customers, including MGM Resorts, Johnson Controls, and a certain large distribution company whose name cannot be disclosed but whom Oracle is furnishing with a complete suite, in what the company’s CEO described as “a very large win.”

If there is something to pick on here, it is probably that the company is a latecomer to a game that is already being played pretty well by other competent market participants. MSFT and AMZN are dominant players and have strongholds all over the playing field.

It’s easy to pick up new customers, but it is not easy to get folks to switch if they’re already happy. And that will increasingly be the game in play as the low-hanging fruit become scarce in big corporate Earth.


Notes from the Sell Side

BMO thinks Oracle delivered impressive top-line results and guidance against low expectations. Q2 reported revenue slightly beat their/consensus estimates, despite incremental FX headwinds, while CC revenue growth of 2% y/y was better than our 1% y/y estimate. Moreover, management is guiding Q3 CC revenue growth of 2-4% y/y, which was better than our 2-3% y/y expectation. They think the top-line guide, including the likelihood of achieving 3% CC growth in FY19, combined with aggressive share buybacks will support the shares; $53 tgt, Outperform.

Needham notes ORCL reported solid 2QFY19 results, but this quarter did not cause us to change our thesis or their HOLD recommendation. They prefer to wait for a more consistent record of quarterly financial results meeting company guidance, further evidence of sustained organic growth in the various cloud business lines, and demonstrated traction in upcoming product cycles; Hold.

Credit Suisse maintains $60 tgt; Morgan Stanley maintains $57 tgt

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