Oracle's fiscal third quarter earnings were better-than-expected, but sales fell short of expectations.
Oracle reported non-GAAP third quarter earnings of 64 cents a share on revenue of $9 billion. Net income for the quarter was $2.14 billion, or 50 cents a share.
Wall Street was looking for Oracle to report third quarter earnings of 62 cents a share on revenue of $9.12 billion. Oracle has missed sales targets the last five quarters.
On the bright side, Oracle did deliver strong cloud growth. The company said cloud software and platform as a service sales were $583 million, up 57 percent from a year ago. But infrastructure-as-a-service sales actually fell 2 percent from a year ago.
However, revenue overall fell 3 percent, on-premise software sales fell 4 percent and hardware revenue fell 13 percent.
Oracle cited a strong dollar for much of its issues and upped its buyback program by another $10 billion. Executives talked up the cloud business.
CEO Safra Catz said:
This dramatic revenue increase drove our non-GAAP SaaS and PaaS gross margins up to 51% in Q3 as compared with 43% in Q2. Our cloud business is now in a hyper-growth phase.
CEO Mark Hurd added:
We had more than 250 customers go live on Fusion SaaS HCM and Fusion ERP in Q3 alone. We now have over 11,000 SaaS customers with nearly 2,000 Fusion ERP customers.
And CTO Larry Ellison noted that Oracle's product breadth should enable it to pass Salesforce. The long menu of cloud products "should make it easy for us to pass Salesforce.com and become the largest SaaS and PaaS cloud company in the world."
As for the outlook, Oracle projected the following constant currency growth rates:
- Fourth quarter SaaS and PaaS revenue growth of 57 percent to 61 percent.
- Infrastructure as a service sales in the current quarter are expected to be down 1 percent to up 3 percent.
- Total revenue growth will be down 2 percent to up 1 percent with non-GAAP earnings of 82 cents a share to 84 cents a share. That outlook is in line with expectations with earnings better. Wall Street was expecting 82 cents a share in the fourth quarter.
Among the key items from Oracle's conference call:
- Bookings growth was 77 percent in the quarter compared to a year ago.
- New software license revenue was $1.7 million, down from last year as customers continue to direct new spend to Oracle Cloud services, said Catz.
- Hurd said Oracle has "cross pillar opportunities" and big customers are connecting HCM, ERP, and sales and marketing clouds in purchases.
Cloud questions will remain
Going into the earnings report, analysts were closely watching Oracle's cloud growth. Some analysts bought into Oracle's cloud transition while others remained skeptical.
For instance, Stifel analyst Brad Reback said Oracle's cloud business was expected to post strong growth in revenue and gross margin as on-premise software and hardware remained weak.
Reback said ahead of the report:
We expect another solid cloud quarter across SaaS and PaaS properties and forecast SaaS/PaaS growth of 47% Y/Y this quarter rising to 53% Y/Y growth in F4Q16. This quarter is somewhat of a "moment of truth" quarter for Oracle, given management's confidence of an accelerating SaaS/PaaS growth rate based on already signed deals and promotional periods expiring.
Wedbush analysts Steve Koenig said his checks revealed that customers had lower cloud renewal rates amid extra cloud capacity. Koenig wrote:
Our partner checks suggest that cloud renewal rates are running significantly below industry-standard levels for SaaS and PaaS (e.g. 85%), and well below on-premise renewal rates in the 90%+ range. Also, our checks indicate that a portion of cloud customers are using less than 20% of their contracted capacity (we estimate on the order of 1,000 PaaS customers out of roughly 6,000 total). These problems are likely related: customers who aren't using their capacity or haven't turned on their cloud services are unlikely to renew metered contracts (we estimate about 50% of all cloud contracts are metered) at their full amount. Unless Oracle can change these trends - which it is trying to do by ramping its "customer success manager" staff by an order of magnitude - cloud bookings are likely to decelerate rapidly (from +66% Y/Y in 2Q) and cloud revenue may not accelerate as much as guided (+55-59% Y/Y by 4Q).
Koenig also said that these questions about cloud attrition and unused capacity may indicate that customers are trying out other databases for workloads. Koenig said customers could be moving database capacity to AWS or Microsoft and looking at other options as unstructured data grabs more of the pie.