Oracle’s shift in focus to the cloud provided the company with a significant lift in its results for the third quarter (ended Feb. 28) as its overall performance came in ahead of analysts’ expectations.
Shares in the company were up more than 7% at $46.23 in early afternoon trading March 16 after Oracle reported third-quarter revenue inched up 2% from the same quarter a year ago to $9.2 billion, while profit grew to $2.2 billion (53 cents a share) from $2.1 billion (50 cents a share).
Total cloud revenue soared to $1.2 billion from $735 million and grew to 13% of total revenue from 8% a year ago. Combined cloud Software as a Service (SaaS) and Platform as a Service (PaaS) revenue jumped to $1 billion from $583 million and grew to 11% of revenue from 6%, while cloud Infrastructure as a Service (IaaS) revenue increased to $178 million from $152 million and remained only 2% of revenue.
Goldman Sachs analyst Heather Bellini reiterated a “Buy” rating for Oracle stock and raised her 12-month price target from $47 to $49 as she boosted her forecasts for the company’s results. “Our confidence is predicated on Cloud revenue being greater than license revenue” in Oracle’s next fiscal year and beyond, with “software maintenance revenue decelerating, yet still growing,” she said in a research note March 16.
“Clearly, we are delighted with our results as software and cloud revenue was at the high end of my guidance” for the third quarter and earnings per share came in at the “high end of my guidance” also, CEO Safra Catz said on an earnings call March 15.
“Our pivot to the cloud is now clearly in full swing,” Catz told analysts, adding: “We continue to see outside growth rates in our cloud business, especially when compared with our key competitors who’re all seeing slowing growth. But more importantly, the increase in revenue from our cloud business has overtaken new software license [business] decline on an annual basis.”
She predicted that cloud revenue will be larger next year than new software license revenue, which came in at $1.4 billion in the third quarter, down from $1.7 billion a year ago, and represented 15% of revenue, down from 18%. Software license updates and product support revenue inched up to $4.8 billion from $4.7 billion, remaining 52% of revenue.
“The investments we’ve made to transition our business to the cloud have been important to ensure that Oracle remains a technology leader and we’re now beginning to see the benefits in our results,” Catz said.
When combining Oracle’s cloud, SaaS and PaaS revenue with its new software license revenue, the company’s revenue grew 11% in constant currency, she said, calling that a “significant milestone in our transformation, where the combination of our cloud and new software license business added together are growing.” She added that, “as cloud becomes an even larger percentage of the total, the growth will only accelerate with earnings and cash flows following along.”
While all of Oracle’s cloud businesses are “growing rapidly,” Oracle CTO and co-founder Larry Ellison said on the call that its IaaS cloud business “will be leading the way in the future.”
Some of Oracle’s “largest customers are negotiating huge infrastructure as a service contracts to move all their databases to the Oracle cloud,” he told analysts, adding: “You can expect some of those big deals to be announced in the coming weeks.”
Ellison pointed out that “fast growth” in the IaaS business was new for Oracle. Although it’s “done well on SaaS and in PaaS over the past few years,” he said “this is the first time we’ve ever had a technology lead” in IaaS. As a result, he said, Oracle is “now in position to help our hundreds of thousands of database customers move millions of Oracle databases to our infrastructure as a service cloud.” SaaS and PaaS are “large, rapidly growing businesses” for Oracle and, together, the two businesses grew 85% in the past quarter, he said. But he predicted that IaaS will soon “be growing even faster and, before long, infrastructure as a service will become Oracle’s largest cloud business.”