Oracle Corp. (ORCL, Financial) reported better-than-expected third-quarter earnings, helping its stock price move higher after the announcement. Wall Street was expecting Oracle to post 62 cents adjusted earnings per share and quarterly revenues of $9.255 billion, and the actual numbers came in at 69 cents adjusted earnings per share and quarterly revenues of $9.21 billion.
Other than its earnings beat, it was heartening to see Oracle maintain its strong double-digit growth momentum in its software-as-a-service and platform-as-a-service segment. Oracle’s SaaS and PaaS segment registered a growth of 73% during the quarter compared to the prior period, reaching $1.011 billion in revenues.
In the first nine months of the current fiscal, the segment's revenues reached $2.686 billion, 77% growth from $1.517 billion during the year-ago period. The company is targeting $10 billion in annual revenues from this segment. If it manages to stay above the 50% growth mark, Oracle should reach that goal in the next two to three years.
Cloud revenues in the first nine months increased by $1.217 billion, which was more than enough to cover for the $434 million decline in on-premise software revenues, $348 million decline in hardware and $53 million in services. As the company’s cloud component keeps growing, its legacy software and hardware lines are slowly declining. This quarter is evidence Oracle has enough strength in the cloud segment to cover for the decline.
Cloud revenues in the third quarter accounted for 13% of the company’s overall revenue, an increase of 4% compared to last year. As cloud grows and other parts decline, this trend should ideally accelerate over the next few years.
The one area Oracle needs to improve is its infrastructure-as-a-service business, which brought in $525 million in the first three quarters and $178 million during the third quarter. The problem is not the revenue numbers, but the growth numbers. Microsoft’s (MSFT, Financial) Azure revenues grew 93% during the most recent quarter, and Amazon (AMZN, Financial) Web Services reported 47% growth during the same period. Both these companies earn in the billions and are growing at strong double-digit rates in the IaaS segment.
At 2% growth, Oracle is still far behind despite being a much smaller player in this space. The company’s IaaS growth rate is much lower than the industry average, suggesting it is not positioned well in the market. As a smaller company, Oracle’s revenues should be witnessing triple-digit growth, not low single digit.
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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