A number of companies are seeing strong results on the back of their cloud-business. Think for example Amazon, which previous earnings were highlighted by its Web Services division (AWS), that is centered around cloud computing services. But also Oracle (symbol: ORCL) is now betting on the cloud and not without results. During the last quarter (FQ2-16), cloud revenues increased 26% to $649 million and were outperforming other divisions. In fact, the cloud-division saved revenues to fall further. Compared to last year, total revenues declined 6% and totaled $ 9.0 billion.
Oracle is relatively late to the game. Its competitors are significantly ahead of the Redwood-based company founded by ‘personality’ Larry Ellison. Amazon recorded $2.1 billion in revenues during the recent quarter, up 78% compared to last year. Microsoft’s Intelligent Cloud tops this with $5.9 billion in quarterly sales. Nevertheless, growth is much more modest with 8% compared to last year. Oracle seeks to maintain current growth rates and guided to 51% growth for the next quarter. For the full fiscal year 2016, the company expects cloud revenues of 47%. This is somewhat lower than previously guided 50%.
Why are tech companies so interested in offering cloud services? It’s relatively high margin business. Oracle CEO Safra Catz expects a gross margin of 43%. Amazon recorded an operational profit of $521 million, so margins are lagging that of its competitors but stand way higher to that of its other ventures. Microsoft was able to increase its gross margin with 8% and is with 41% in the same league as Oracle. In addition, for Oracle it is a logical next step. Many enterprises with large data servers run on Oracle applications. Oracle is able to offer more competitive pricing for companies to migrate to the Oracle cloud. Next to that, customers will prefer to stay in the same Oracle environment when their companies run on Oracle ERP-applications. IT-projects, especially concerning migration of data and platforms are prone to be costly and challenging. Staying in a familiar, proven environment makes sense for customers.
Will Oracle be able to succeed in its cloud-quest? That is yet to be seen, but the company is being aggressive in its mission. According to sources, the company hired some of the best and brightest of its competitors, mainly from AWS. Founder, Chairman and Chief Technology Officer Larry Ellison is well known for its determination. His ‘battle’ against Microsoft is a well-known story. Also the PeopleSoft acquisition came from Ellison’s grit to ‘eliminate’ a rival. So count on Oracle to become much bigger in the cloud business.
Does that mean Oracle is a buy? After the earnings release, which was more or less in line, shares dropped with roughly 5% due to a slightly disappointing guidance. For fiscal 2016, analysts expect a small decline of 2% in revenues with consensus standing at $37.6 billion. Earnings per share are expected to drop 7% to $2.60, but may increase to $2.85 in fiscal year 2017 (consensus). Currently trading at slightly above $37, that would mean a price/earnings-ratio of 14.2 to 13.0 and price/sales stands at 4.2. It’s main peer Microsoft trades at a 2016e p/e of 20.4 and a p/s-ratio of 4.9. So Oracle looks relatively cheap.
But the key question will be whether Oracle can maintain the growth pace in its cloud business and will it become a leading player in this field. If it’s up to Larry Ellison, he will not rest before Oracle gets there…
