Oracle released its Q4 and fiscal 2017 earnings on June 21, and managed to beat its own earnings guidance and analyst estimates by a comfortable margin of over 10 cents per share. The revenues also exceeded the analyst estimates by over $300 million, which led its stock to jump by around 10% after the earnings release.
The reason behind Oracle’s successful quarter and fiscal year was its deals with large enterprises such as AT&T, Netflix, BNP Paribas, Kraft Heinz, and more. The company was able to return to growth in terms of GAAP revenues after 2 years of soft performance. The company's annual recurring revenue hit an all time high of over $2 billion which bodes well for its future performance. A 69% constant currency rise in the software-as-a-service revenue led to 14% margin expansion for the division, which has been instrumental in the 6% rise in non-GAAP EPS.
Fiscal 2017 is being termed a turnaround year for Oracle, and the company is likely to experience similar growth in the upcoming year given the fact that the transition phase to cloud is in its final stages, and the company is set to take advantage of its growth. Rising margins in conjunction with the top-line growth will be an added advantage to boost the bottom line in the future.
Cloud ERP, PaaS & IaaS Can Be The Leaders In Oracle’s Growth
Oracle is a leader in the cloud ERP (Enterprise Resource Planning) software market, which according to alliedmarketresearch is expected to grow by 7% annually to reach over $40 billion by 2020. Oracle’s SaaS revenues are growing faster than this rate, so it certainly appears to be moving in the right direction in terms of market share.
Also, Oracle’s combined PaaS (Platform-as-a-service) and IaaS (Infrastructure-as-a-Service) revenue rose by 42% in Q4. Chairman Larry Ellison is signaling that this segment will grow faster than SaaS in the future, which - if this materializes - can allow it to become a major source of revenue for the company. He plans to compete directly with Amazon in IaaS and has often claimed that Oracle’s second generation data centers are superior to Amazon’s AWS.
While Oracle still has a way to go in the cloud space, it has been successful in implementing a turnaround in its position in the industry and the above factors can help it to compete head on with major players such as Amazon in the next few years.
Future Margins Are Looking Strong
On the margins front, the SaaS business is on the right track to reach 80% gross margin as guided by the company. On the other hand, IaaS margins are seeing pressure, but this is normal as the business is undergoing high expenses and investments in the initial phases. As it progresses, we expect it to return to margins of over 40% by early in the next decade. All of these factors indicate margin expansion for Oracle over the next few years, which should lead to future earnings growth.
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