Oracle Corporation’s (ORCL) F3Q17 EPS easily beat consensus mostly on nonoperating items and non-software operating costs, but the license decline improved from F2Q17 while F4Q17 guidance, while slightly lower ex-FX, was not as bad as feared. SaaS & PaaS revs and billings surged, though all of the acceleration appears to be NetSuite, which was not broken out. But double digit FY18 EPS growth was reiterated, as the license decline moderates behind fewer app licenses in the mix and a less pronounced database cloud transition. In all though the quarter and guide provides support for the bull case in the firm’s view, that ORCL is past the worst of its cloud transition. MKM Partners is remaining Neutral though, with ORCL's cloud revenues largely a "lift and shift" hosting of previously on-premise workloads, rather than net new multi-tenant cloud workloads (like Azure and AWS), the firm doesn't think the stock attains a Microsoft (MSFT-Neutral, $60 FV) P/E especially with negative TTM operating cash flow. MKM’s FV goes to $45 from $42, calculated as 16x FY18E EPS (vs. MSFT at 20x its FY18E EPS).
EPS of $0.69 was $0.07 ahead of consensus, though $0.04 came from better non-op. income and a lower tax rate. Of the nearly $130mn in lower than projected opex, $11mn came from software, $14mn from hardware, $14mn from services and $87mn from R&D and G&A. G&A of $209mn was the lowest in three years, and down 20% Y/Y despite NetSuite. SaaS & PaaS gross margins of 65% were in line, and F4Q17 guidance is flat vs. expectations of Q/Q improvement.
Revs of $9.28bn beat modestly as gains in on-prem. software (license & maint.) offset declines in hardware and services while cloud (SaaS, PaaS & IaaS) was in line. License declined 15% ex-FX vs. down 19% in F2Q17.
SaaS & PaaS rev and billings growth surged (86%/111%, respectively), though excluding an estimated $190mn in NetSuite subscription revenues and $300mn in billings, growth was in line with recent quarters when adjusted for the compares, and the $2bn FY17 ARR goal was maintained. Still N doesn't appear to have presented any execution issues.
F4Q17 guidance was a bit lower for revs even without 1% worse FX, but not as bad as feared given ORCL's alerts about F4Q license seasonality amidst the shift to SaaS, and EPS was in line. ORCL reiterated FY18 double digit EPS growth, bolstering the bull case that ORCL is past the worst of its cloud transition, in the firm’s view.
ORCL bulls will likely look to MSFT's P/ E as a proxy, which at 20x its FY18E EPS is, like ORCL, projected to grow the fastest in years at 10%, but the firm doesn't think the comparison is appropriate. MKM thinks MSFT is being rewarded for Azure's unique competitive advantage as one of only three hyperscale clouds, generating net growth in workloads, vs. ORCL's largely fee-oriented growth for existing workloads. While MSFT's margin improvement is from cloud economics, ORCL's thus far is largely from areas outside of cloud economics, while op cash flows and free cash flows have lagged. Still the wide P/E gap should close some, in MKM’s view, hence its new higher fair value estimate.
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