Oracle Corporation (ORCL, Financial) is a multinational tech company based in the United States that offers products and services including information technology applications, platforms and infrastructure. The company operates through three segments:
- Cloud and on-premise software: this segment consists of software-as-a-service solutions, platform-as-a-service offerings, cloud infrastructure-as-a-service products, software license updates and product support.
- Hardware.
- Services: this segment includes consulting services, support services and education services.
Oracle released its fiscal fourth-quarter 2021 earnings on June 15, exceeding analyst expectations for both earnings and revenue. The company reported earnings of $1.54 per share, which topped the analyst consensus estimate of $1.33 per share. Oracle shares, however, slumped 5% in after-hours trading on June 15 as the company issued weaker-than-expected quarterly sales projections due to planned investments in cloud computing.
The company's leading position in the enterprise resource planning sector is gaining traction and its ERP and database services benefit from a supply-constrained Oracle Cloud Infrastructure, giving it a substantial competitive advantage. Oracle Fusion and NetSuite are the world's most popular cloud ERP systems, and the company is well-positioned to leverage this market position to deliver strong earnings in the future.
Oracle reports strong financial growth
The company reported net revenue of $11.23 billion for the May quarter, up 8% from the previous year. Fusion, Autonomous Database and Gen2 OCI were the key revenue growth drivers. The cloud services and license support segment generated revenue of $7.39 billion, an increase of 8%. Fusion ERP, Fusion HCM and NetSuite revenue climbed by 46%, 35% and 26%, respectively, and Gen2 Cloud Infrastructure revenue rose by more than 100% year-over-year. The revenue from cloud licenses and on-premises licenses increased by 9% to $2.14 billion. Oracle's hardware segment saw a 2% yearly reduction in revenue, totaling $882 million, which highlights the ongoing challenges the company is facing from this segment. The company repurchased 107 million shares for a total of $8 billion as well, highlighting its commitment toward shareholders.
Commenting on revenue growth, the Chairman and chief techology officer (CTO) of Oracle, Larry Ellison, said:
“Clearly, our strategy to develop cloud applications with cloud infrastructure is now beginning to drive top-line revenue growth to go along with years of consistent double-digit earnings per share growth.”
Total revenue for the full year of fiscal 2021 increased by 4% to $40.5 billion, with cloud services and license support revenue up 5% to $28.7 billion and cloud licensing and on-premise licensing revenue up 5% to $5.4 billion. Operating income increased by 9% to $19.0 billion in fiscal 2021, while net income increased by 11% to $14.1 billion. Earnings per share increased by 21% thanks to the positive impact of share buybacks, and this confirms that the company’s buyback program is value accretive for shareholders.
The company plans to launch cloud application suites for two new industries: health care and local governments. This planned expansion in its product portfolio is expected to help Oracle generate strong growth in the next few years.
Commenting on these plans, Ellison said:
“Our cloud application portfolio is more complete than other apps vendors and better integrated because almost all of our applications were developed internally, not acquired. Our infrastructure strategy depends on AI technology, specifically, neural networks and machine learning that we use to develop the second generation autonomous cloud services, such as the Oracle Autonomous Database, the Oracle Autonomous Linux operating system, and an array of autonomous cybersecurity defense bots that automatically identify and neutralize cyber-attacks. All of Oracle’s cloud applications then run within the defensive perimeter of Oracle’s autonomous cloud infrastructure, the most reliable and secure platform in the world. And that’s increasingly important in a world plagued by cyber warfare, data theft, and ransomware.”
Despite the increasing competition in the industry, Oracle is well-positioned to report stellar earnings in the coming years because of its diversified product portfolio and market leadership in fast-growing segments.
Industry outlook
Accenture (ACN, Financial) reports the global cloud services market has grown at a compound annual growth rate of approximately 380% over the last 10 years, reaching a value of $370 billion in 2020. The increasing adoption of cloud computing has changed the way businesses operate. Companies all around the world are implementing the most cutting-edge technology advancements as they understand the importance of this technology since it provides greater flexibility and better data management solutions. According to industry experts, the future of the cloud computing market looks promising, as demand for data security and cost-effective data management increases. According to Gartner Research, global end-user spending on public cloud services is predicted to rise 18.4% to $304.9 billion in 2021.
Commenting on the industry’s growth, Gartner vice president Sid Nag said:
“The pandemic validated cloud’s value proposition. The ability to use on-demand, scalable cloud models to achieve cost efficiency and business continuity is providing the impetus for organizations to rapidly accelerate their digital business transformation plans. The increased use of public cloud services has reinforced cloud adoption to be the ‘new normal,’ now more than ever.”
The integration of Artificial Intelligence and Machine Learning will be the major growth driver for cloud service providers in the next few years. AI allows businesses to scale, adapt, manage and automate operations with ease. According to International Data Corporation, global revenue for the artificial intelligence market, which includes software, hardware and services, is expected to grow at a compounded annual growth rate of 16.4% to $327.5 billion in 2021 and reach $554.3 billion by 2024, at a five-year CAGR of 17.5%.
Takeaway
Oracle is one of the most profitable companies in the software technology sector and is cheaply valued at a forward price-earnings ratio of 21.38 in comparison to the sector average of 32.42. Although the company is facing challenges as it shifts the business model to embrace new trends, I believe Oracle is well-positioned to take advantage of the booming cloud market. The company has a strong track record of shareholder distributions as well, which makes it a good pick for both value and growth investors.
