Oracle’s (ORCL, Financial) second quarter results came in slightly better than market expectations on the earnings front, while falling short of revenue estimates. Wall Street was expecting Oracle to report earnings of 60 cents per share on the back of $9.12 billion in revenues. The company posted earnings of 61 cents per share with revenues of $9.07 billion.
"For four consecutive quarters our Cloud SaaS & PaaS revenue growth rate has increased," said Oracle CEO Safra Catz. "As we get bigger in the cloud, we grow faster in the cloud. Our non-GAAP constant currency SaaS and PaaS growth rate is now up to 89%. This growth rate acceleration has driven our quarterly cloud revenue over the $1 billion mark."
The trend of growing cloud-based revenues and declining legacy revenues continued through the quarter. In the first six months of the current fiscal, total cloud revenues have grown by 61% to hit $2.021 billion while new software licenses declined by 16% and hardware revenues declined by 11%. But the good news for the company is that the growing parts of their business were good enough to offset the losses in their old business lines, resulting in a 1% revenue growth in the first half of this year compared to last year.
Oracle’s revenue from cloud has now crossed over the crucial mark of $1 billion per quarter, accounting for 12% of their total revenues during the second quarter. Oracle’s total cloud-based revenue was $1,053 million, with software as a service (SaaS) and infrastucture as a service (IaaS) segments bringing in $878 million and $175 million. In the second quarter of 2015, Oracle’s total cloud revenue was $516 million with SaaS bringing in $361 million and IaaS getting $151 million.
Cloud sales have nearly doubled in eight quarters, with most of the growth coming from their SaaS unit, which has always been the area of strength for Oracle. The company has made its intentions clear to get things moving on the cloud infrastructure front, but they are still many a mile away from current segment leaders Amazon (AMZN, Financial) and Microsoft (MSFT, Financial). SaaS is their best bet for now, and the company’s acquisition of Netsuite this year will be a key booster shot moving forward.
Oracle wants to take its SaaS and PaaS revenues to the $10 billion mark in eight quarters at the earliest. Though this segment has been growing at strong double-digit rates, the current run rate is only a little more than $4 billion. If it continues the current growth rate, it might take Oracle another two years or more to reach that level.
Current SaaS and PaaS revenues stand at $878 million. To reach $10 billion in annual revenues, the segments have to move to the $2 to $2.5 billion per quarter sales mark, which is why I brought in the two-year time frame. In fact, even that will just about put them at the starting line majors like IBM (IBM, Financial), Microsoft and Amazon are already leaving behind.
Eight quarters is a long time, but if Oracle can get close to that target in that time, then it will have successfully transitioned towards more forward looking business lines rather than merely being the company that makes hardware and software for companies to manage their own infrastructure.
The market opportunity was closing fast due to the growth of the cloud industry and the growing dominance of the top three players, so the database king had no choice but to look outside to keep it future growth prospects intact. If they can keep the momentum up, the Oracle we will see two years from now will be a very different company from what it is today.
As such, tracking their progress over the next several quarters is key to making an investment at the right time. As the inevitable dips in stock price occur, that is the time to build your position. Building it slowly, over the two-year period in question, will give you a much wider margin of error.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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