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☁️ Oracle: Cloud Catcher?
Larry Ellison was once a cloud-basher. Today, the cloud forms a quarter of Oracle Corporation’s (ORCL) business. It was cloud infrastructure that contributed to its Q4 earnings beat. With approval for Cerner in place, can Oracle outperform big-tech that’s grappling with their own issues?
Coming A Full Circle
“Fad,” “Nonsense,” and “Gibberish” – were adjectives that Oracle co-founder Larry Ellison used for cloud computing back in 2009. Ellison accused VCs of hyping up the latest “buzzword of the day.” Calling it “idiocy,” he questioned the longevity of the same. After such brutal remarks, Ellison announced Oracle’s foray into the cloud for marketing and sales.
By 2009, Amazon was already three years, and Google was two years into their AWS and Google Cloud businesses, respectively. Salesforce had just gotten Service Cloud off the ground, while Microsoft’s Azure became available for public use in 2010. Ellison began to warm up to the idea by 2012. By then, Oracle’s peers had already established themselves within the cloud market.
He aimed for Oracle’s cloud to be a “comprehensive development and execution environment that can run virtually all applications.” In a big-bang announcement, Oracle’s cloud strategy changed from Oracle Fusion to Oracle Cloud.
Oracle began to offer over 100 apps delivered in cloud-based software as a service model. It acquired two companies between 2010-2012 – Taleo for $1.9B and a customer service app RightNow for $1.4B. Ellison also led Oracle’s foray into the infrastructure as a service (IaaS) market. Today, Oracle’s cloud division contributes to a quarter of its overall topline.
Once hated by Ellison, cloud computing contributed to Oracle’s earnings beat in the fourth quarter of FY22.
Key Highlights From Q4 FY22:
- Revenue: $11.84B Vs. $11.61B expected
- Earnings Per Share: $1.54 Vs. $1.37 expected
Oracle’s consolidated revenue was up 5.5% year-on-year. The cloud business witnessed 19% growth. The division has been growing 20% consistently since Oracle began disclosing its numbers last year.
Increased demand in the infrastructure cloud business was the key growth catalyst. In constant currency, Oracle’s cloud revenue will likely grow 25% this quarter and 30% for the full fiscal year. CEO Safra Catz believes the infrastructure cloud business has entered a “hyper-growth” phase.
Half of Oracle’s revenue comes from outside the Americas. The US Dollar scaled its highest level since April 2020 on Monday as traders began to price in more aggressive rate hikes from the US Federal Reserve.
The currency volatility impacted Oracle’s revenue by 5%, much higher than the 2-3% impact in Q3. For the current quarter, Oracle expects a 3-4% hit to the top line and $0.05 to EPS due to a volatile greenback.
Tech companies, particularly those with significant exposure overseas, have borne the brunt of a stronger USD. As a result, Salesforce cut its full-year revenue guidance, while Microsoft also cut back on its revenue and profit estimates for the current quarter.
From Database To Healthcare Via Cloud
A stalwart within database management services, Oracle is facing issues within this business. Customers are moving towards new, emerging rivals like MongoDB, Databricks, and Snowflake. Oracle’s products require large database teams for support, which isn’t the case with newer players’ offerings- a key reason behind the client shift.
The cost-saving factor has prompted companies like Shutterfly, Nasdaq, JPMorgan, JetBlue, and ADP to look at other alternatives. For example, Shutterfly has moved to AWS, as has Nasdaq, while JPMorgan has chosen Cockroach Labs as its database vendor.
With one business facing trouble, Oracle is looking at establishing a first-mover advantage in sectors like healthcare, which has been slow off the blocks in adapting to the cloud. Last week, the company received a big boost when its proposed $28B acquisition of Cerner Corporation received regulatory approval. Cerner is the largest acquisition in Oracle’s history.
The combined entity aims to create a national health record database with data from several thousand hospitals. Patients’ data will remain anonymous until individuals consent to sharing the same.
Cerner will now be accretive to Oracle’s earnings from the current quarter. Hence, the management expects the Q1 topline to grow 19% from last year. In addition, Ellison wants healthcare to become Oracle’s most significant business division.
Analysts believe that Oracle’s license spending growth was positive, reflecting continuing investments from the company’s clients in these uncertain times. The sale of cloud and on-premise licenses was up 18% in Q4 to $2.54B, higher than estimates of $2.17B, while that of its enterprise planning tool NetSuite was also up 27% from last year. NetSuite targets small and mid-sized businesses.
Oracle’s results were soothing to a market where everything is down in the dumps. Shares rebounded from a 16-month low, gaining after-hours on Monday and regular trading on Tuesday. Although the stock is still down year-to-date, the losses narrowed to 20% after Tuesday’s surge. Peers from Amazon to Salesforce, Microsoft, and even the Nasdaq are down anywhere between 30-40% this year.
On the valuation front, Oracle trades at 24.5x on a trailing-12-month price-to-earnings basis, cheaper than peers like Microsoft (25.3x), Amazon (52x), and Salesforce (152x). Salesforce trades at these valuations even after halving from its peak.
In hindsight, Larry Ellison would be thanking his stars for warming up to the cloud. It not only forms a quarter of Oracle’s business but is also charting a path for its future growth. It has now pinned hopes from Cerner that it will take Oracle from cloud one to cloud nine! Will they succeed? Maybe an Oracle would have the answer to this!
ORCL ended at $70.72, up 10.41%.
Company Snapshot 📈
ORCL $70.72 +6.67 (10.41%)
Analyst Ratings (28 Analysts) BUY 29% HOLD 61% SELL 10%
Later Today 🕒
- John Wiley & Sons Inc. Earnings (WLY)
- 6:00 PM IST: Retail Sales
- 11:30 PM IST: FOMC Statement & Projections
- 12:00 AM IST: Fed Chair Jerome Powell News Conference
Today’s Fun Fact
The Exxon Valdez oil spill of 1989 killed over 250,000 animals including seabirds, sea otters, bald eagles and killer whales