Software giant Oracle (ORCL -0.09%) reported 18% year-over-year revenue growth for its fiscal third quarter, which ended on Feb. 28. That sounds impressive, but almost all that growth came from the company's mega-acquisition of healthcare technology company Cerner.
Oracle doled out $28.3 billion to acquire Cerner in a deal that closed last June. Of the company's $12.4 billion third-quarter revenue, $1.5 billion came from Cerner. Kudos to Oracle for actually disclosing that number -- some prolific acquirers leave it as an exercise for investors to figure out how much acquisitions contributed to the top line.
A mixed bag
If you back out the contribution from Cerner, Oracle's organic revenue grew by just 3.8%. Given the mission-critical nature of much of Oracle's portfolio, headlined by its iconic database software, it's not surprising that the company's revenue is holding up in a tough economy. But low-single-digit growth is far from impressive.
Parts of Oracle are growing quickly. Oracle's cloud infrastructure business, which competes with Amazon Web Services and other cloud providers, grew revenue by 55% year over year to $1.2 billion. Oracle is a small player in this market, with a market share of roughly 2% as of the third calendar quarter of 2022, but it's growing rapidly.
Oracle's cloud-based enterprise resource planning products are also performing well. Fusion Cloud ERP grew revenue by 25% to $0.7 billion in the third quarter, while NetSuite Cloud ERP grew revenue by 23% to $0.7 billion. Revenue from software-as-a-service was up 42% year over year to $2.9 billion, but the acquisition of Cerner probably drove some of this growth.
Services revenue soared 74% year over year to $1.4 billion, but again, a significant chunk of this growth was probably due to Cerner. The weakest parts of Oracle's results were hardware revenue, which grew by just 2%, and cloud license and on-premises license revenue, which was flat.
While GAAP net income was knocked down by amortization charges related to acquisitions, Oracle's adjusted net income rose about 9%. The company boosted its quarterly dividend by 25% to $0.40 per share, bringing the forward dividend yield up to 1.9%. That's not a particularly high yield, especially for a slow-growing tech giant, but it is an improvement.
Is Oracle stock a buy?
Oracle is still a big player in the database market, although the company is facing stiff competition enabled by cloud computing. Global revenue from managed cloud databases now comes close to exceeding revenue from on-premises databases, according to Gartner, an indication that companies are eager to switch to a more flexible deployment model.
Oracle's database market share has fallen dramatically, from 36.1% in 2017 to just 20.6% in 2021, as database solutions from competing cloud platforms have gained share. Still, there are plenty of businesses running mission-critical Oracle databases on their own hardware that face such high switching costs that a move to a competing cloud and an alternative database solution is unlikely.
While Oracle's various cloud businesses can certainly drive revenue growth, the company doesn't have the same competitive advantages it has historically enjoyed in the database software business. Oracle remains a highly profitable company, but those profits may come under some pressure as the database market becomes more competitive.
Analysts are expecting Oracle to report adjusted earnings per share of $4.90 for fiscal 2023, which puts the price-to-earnings ratio at about 17. Given the sluggish organic revenue growth, that doesn't seem like a particularly good deal to me.
Oracle stock is still up substantially from where it traded before the pandemic. Those gains may not stick around if the company fails to convince investors that its cloud businesses underpin a legitimate growth story.