Oracle Earnings Preview: The Breakout Holds, But Can They Fix The Cloud Issues?

Summary

• Oracle - one of the 1990s "Original Gangsters" - broke out above its previous $45, April 2000 all-time-high in June '17, but has struggled since that time.
• The Cloud is a growth area for Oracle, but Oracle revenue growth has been inconsistent.
• Oracle has put up 4 quarters of mid-single-digit revenue growth after 5 years of mediocrity, somewhat aided by the weaker dollar.
• Total Cloud segment revenue is 16% of Oracle's total revenue - we'd like to see that trend into the 20% range.

Oracle (NYSE:ORCL), the database giant that has struggled mightily to get its Cloud segments up and running smoothly, reports its fiscal Q3 '18 financial results after the market close on Monday, March 19th, 2018.

The stock broke out to an all-time high after the release of the May '17, fiscal Q4 '17 financial results in mid-June of 2017, when actual revenue and EPS beat estimates handily, but the last two quarters have been just okay, and the stock has remained stuck in a trading range between the $46 area on the low and $53 in the upper end of the range.

I do think it will take renewed strength in the Cloud metrics to bust the stock out of the high end of the trading range.

Oracle's business lines and transition from a 1980s and 1990s database giant to the Cloud segment have been written about many times over the last few years (here, here and here).

As readers can see, the theme of my Oracle earnings previews the last few years has been pretty consistent and once again we're faced with some worries over the consistency of growth within Oracle's Cloud segments.

To be clear, the Cloud segment is growing for Oracle, but it moves in fits-and-starts as the last two quarters have shown. I think shareholders would like to see some consistent growth in Cloud revenue as well as some stability in the operating margin.

Here is the trend in Oracle's Revenue and EPS estimates:

	Q3 '18 (est)	Q2 '18	Q1 '18	Q4 '17
2020 EPS est	$3.47	$3.43	$3.36	$3.36
2019 EPS est	$3.18	$3.17	$3.17	$3.18
2018 EPS est	$2.94	$2.94	$2.93	$2.93
2020 est EPS gro rt	9%	8%	6%	6%
2019 est EPS gro rt	8%	8%	8%	9%
2018 est EPS gro rt	7%	7%	7%	7%
2020 P.E	15x	14x	15x	13x
2019 P.E	16x	15x	16x	14x
2018 P.E	17x	16x	17x	15x
2020 rev est ($'s bl's)	$43.1	$43.3	$43.3	$42.8
2019 rev est	$41.3	$41.2	$41.2	$40.9
2018 rev est	$39.8	$39.7	$39.6	$39.3
2020 est rev gro rt	4%	5%	5%	5%
2019 est rev gro rt	4%	4%	4%	4%
2018 est rev gro rt	5%	5%	5%	4%

Click to enlarge

Source: Thomson Reuters I/B/E/S consensus estimates as of 3/9/2018

Here is another table that shows the Cloud segment (Paas/Saas/Iaas) revenue as a percent of total Oracle revenue the last 2 years:

2/18 Q3	?
11/17 q2	16%
8/17 q1	16%
5/17 Q4	13%
2/17 Q3	14%
11/16 Q2	12%
8/16 Q1	11%
5/16 Q4	9%
2/16 Q3	8%

Click to enlarge

Source: Oracle earnings reports and 10-Qs

As readers can see, the Cloud segment revenue has doubled in the last 8 quarters, but the big part of the ramp occurred in calendar 2016.

Conclusion:

I'd rather not write War & Peace for readers over what is a basic premise around the stock: the legacy license applications business, which was over 30% of Oracle's total revenue at one point, has fallen to 14% of revenue as of last quarter, while the Cloud revenue continues to ramp.

New license software applications (the old database business) fell year over year for 13 straight quarters until last quarter when it was flat y/y, so that is a mild positive as the Cloud is positioned for growth.

But can the Cloud get real traction? Morningstar calls the Saas/Paas/Iaas Cloud offerings of Oracle "convoluted" and one sell-side firm thinks that Oracle could be a "value trap", but as any good fundamental investor who has been burned too many times by optimistic forecasts, I give Oracle the benefit of the doubt since the stock has broken out above its previous April 2000, $45 all-time high and the stock continues to trade above $45 per share or the breakout level.

Oracle's Iaas (Infrastructure-as-a-Service) supposedly competes with Amazon's (AMZN) AWS offering, per one research report I read, but since I'm technologically challenged pumping gasoline, and can't determine for myself the relative value of Oracle's IAAS offering, you'd have to give Amazon the edge in that battle.

But don't ever count Larry Ellison out.

Mark Hurd - in my opinion - was hired to focus on costs and operations after the tough days of watching the PC business decline in the 2000s, but Mark and Safra Katz as seeming co-CEOs is never a good dynamic in my opinion.

The NetSuite deal - from everything I read about it - is a plus in my opinion. But hopefully the deal can help move the numbers and offset some of the dilution.

Clients have a 2% position in the stock, and it could increase with some consistency in Cloud growth.

Analyst’s Disclosure: I am/we are long ORCL, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.