Oracle (NYSE:ORCL) shares slid 8% on Sep. 15 after the tech giant reported its first quarter earnings. That sell-off was surprising; Oracle soundly beat analyst estimates on both the top and bottom lines. Let's take a closer look at Oracle's quarter to see if the stock is a worthy buy after its post-earnings dip.
The key numbers
Oracle's revenue rose 7% annually to $9.21 billion during the quarter, beating expectations by $180 million and marking its fifth straight quarter of positive sales growth. Much of that growth was attributed to the strength of its cloud businesses.
Oracle's total cloud revenues rose 16% annually to $1.47 billion. Within that total, its SaaS (software as a service) revenue jumped 62% annually to $1.1 billion, while its combined PaaS (platform as a service) and IaaS (Infrastructure as a Service) revenues rose 28% to $400 million.
However, Oracle's on-premise software revenues rose just 2% to $5.92 billion, and its 3% growth in software license updates and support revenues barely offset a 6% decline in new software license revenues. The remainder of Oracle's revenue came from hardware and services, which respectively posted a 5% decline and 6% growth.
On the bottom line, Oracle's GAAP earnings grew 19% to $0.52 per share, while its non-GAAP EPS rose 12% to $0.62, topping estimates by two cents. That growth was mainly supported by stock buybacks and the expanding margins at its SaaS business.
The good news
Oracle's plan to pivot away from its older on-premise businesses toward higher-growth cloud businesses is clearly working. Its SaaS gross margin hit 67% during the quarter, up from 59% a year earlier. Oracle believes that figure could "possibly" hit 80% by 2019.
During the conference call, Oracle founder Larry Ellison claimed that the company's new AI-driven database platform -- which will be unveiled in October -- would be more reliable than Amazon's (NASDAQ:AMZN) AWS (Amazon Web Services), since it could "automatically tune, patch, and upgrade itself while the system is running."
This isn't the first time Ellison took aim at AWS. Last year, he mocked AWS for using "slow first-generation cloud infrastructure." Earlier this year, he declared that it was "absolutely impossible" to process the "largest and most demanding Oracle database workloads" in AWS.
Oracle's annual cloud run rate of about $6 billion remains much lower than AWS' run rate of nearly $15 billion. But Oracle believes that its SaaS and PaaS/IaaS could both eventually generate $10 billion in annual revenues.
The bad news
However, Ellison's prediction of Oracle countering AWS in the PaaS/IaaS market might be premature. There have been widespread reports of AWS poaching Oracle's database customers, and AWS' brand recognition and scale could put considerable pressure on Oracle's cloud business in the future.
Oracle's PaaS/IaaS business had a gross margin of 44% for the quarter, down from 58% a year earlier. Oracle attributed that decline to a "geographic build-out" in response to demand which would eventually generate more revenue, but the bears will likely question its ability to keep pace with AWS.
But what really sank the stock was Oracle's guidance for the second quarter. On a constant currency basis, it expects its revenue to rise 2% to 4% annually, and for its non-GAAP earnings to improved 5% to 11%. Those numbers weren't bad, but analysts had expected more than 4% sales growth and 11% earnings growth for the quarter.
Is it time to buy Oracle?
I believe that Oracle's sell-off was a knee-jerk reaction, and that its expectations for the second quarter still represent solid growth. Its short-term deferred revenue, a key indicator of future demand, rose 9% annually to $10.3 billion last quarter -- so its growth won't dry up anytime soon. Oracle also expects a weaker dollar to boost its reported revenue and GAAP earnings by about 3% this quarter, which could offset its "softer" constant currency growth.
Oracle's stock remains up nearly 27% for the year after its post-earnings dip, yet it still trades at a reasonable 16 times next year's earnings. Therefore, if you believe that Oracle's cloud services will keep growing and its margins will keep expanding, it could be a great time to start a new position in this evolving tech giant.
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