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Oracle Might Not Challenge Cloud Providers But Investors Are Pleased

Amid all the chaos caused by the COVID 19 pandemics causing global stock to tumble, software giant Oracle Inc. (NYSE: ORCL) has managed to achieve the best revenue growth in almost two years.

Benzinga · 03/13/2020 13:54

Amid all the chaos caused by the COVID 19 pandemics causing global stock to tumble, software giant Oracle Inc. (NYSE: ORCL) has managed to achieve the best revenue growth in almost two years. Moreover, Oracle is the first among the large firms in tech to report figures from a period that includes the coronavirus pandemics.

Although Oracle has so far failed to challenge the biggest cloud infrastructure providers Amazon.com, Inc. (NASDAQ: AMZN) and Microsoft Corporation (NASDAQ: MSFT) whose JEDI wars aren't over just yet, neither is Oracle done trying as it has a strength of its own which its latest earnings report showed.

Q3 Earnings Report

The company has managed to increase sales 1.9% compared to last year as sales amounted to $9.8 billion, marking its best performance since May 2018 and resulting in a profit of $2.6 billion, or 79 cents a share. Before this increase, Oracle has struggled quite a bit to increase revenue as it kept posting year-over-year gains of less than 0.5% for six consecutive quarters.

After adjustments, earnings amounted to 97 cents a share. This is an increase from last year's 87 cents a share.

According to FactSet, analysts on average expected adjusted earnings of 96 cents a share on sales of $9.75 billion. The cloud license segment achieved $1.23 billion in revenue, which is down 2%  but at least more than the $1.19 billion FactSet consensus estimated. However, both the company's hardware and services divisions missed expectations. Hardware was down 6% as its revenue amounted to $857 million, significantly missing the FactSet consensus was $878 million. Services revenue was down only 1% but reached $778 million whereas FactSet consensus was more optimistic at $781 million.

COVID-19

Reportedly, there has been no discernible impact on sales so far but that is due to the fact that  Oracle is somewhat protected thanks to the strenghts of its business model. Its stock, however, has not been immune to the recent market tumble.

But, Oracle wasn't performing well before the coronavirus hit either as shares have declined 24.6% in the past year.  Oracle  shares rose as much as 4.44% immediately following the results but later lost much of their gains Thursday after hours, following already a drop of 11% during the day's trading session. The company's stock traded lower on Thursday than it had since 2017, as this was really a Black Thursday for Wall Street.

Challenges

Oracle is reportedly laying off employees in Europe, which adds to the image of encountering difficulties to achieve promised revenue growth as it attempts to catch up with cloud peers. If we also consider the significantly slower pace of hiring that took place since September last year, it is obvious that  the path to the cloud is presenting structural challenges for the company. As for its guidance for the fiscal fourth quarter, as the case with other companies, it was left wide due to the COVID-19 uncertainty.

The projected revenue ranges from a decline of 2% to a gain of 2% resulting in a range of $10.92 billion to $11.36 billion.  The middle of the range for quarterly revenue guidance was slightly lower than expected as analysts estimated $11.31 billion. Adjusted earnings guidelines were in the range of $1.20 to $1.28 a share in which FactSet analyst estimates of $1.23 do fit in.

Competitors

Oracle's leadership position in enterprise databases should position it well for cloud-enabled database services. However, it is unlikely that it could become a serious threat to Amazon and Microsoft. Meanwhile, another cloud software giant Salesforce.com, inc. (NYSE: CRM) also has managed to beat the latest earnings estimates for the 12th consecutive quarter on Feb. 25 as its e-commerce traffic surged in Q4. According to Salesforce, the increased prevalence of mobile wallet solutions such as Apple Pay (NASDAQ: AAPL) and PayPal (NASDAQ: PYPL) has had its fair share in changing consumer behaviour when it comes to shopping. But both of these companies have issued revenue warnings of the COVID 19 impact so let's hope that the strong  increase in e-commerce that benefited many digital retailers won't be contaged, not to say diminished entirely, by the coronavirus.

Salesforce is also San Francisco's largest private employer as it has more than 7,000 employees in the city itself. Therefore, the responsible thing to do was to ask its employees in California to work remotely in March due to the pandemics so there will be some impact on its workings. But this is surely a company who can protect its system well from any hacking attempts.

Outlook For Oracle

On the bright side, analysts appreciate Oracle's execution capacity and find it to be among the best in the industry. During the past two recessions, it has successfully increased its margins thanks to its ability to cut costs rapidly. And overall, the third quarter earnings report pleased investors as it showed that cloud subscriptions succeeded at driving growth.

There's no arguing that Oracle's revenue growth has slowed recently as the company continues to navigate a path to the cloud but there is evidence that it has decisively shifted toward a more predictable subscription model that will continue pushing its revenues and profit up.

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