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  1. Home
  2. / Investing
  3. / Technology

Oracle's Earnings and Guidance Raise Fresh Concerns About Its Revenue Momentum

Larry Ellison's company continues to grow much more slowly than the broader enterprise software market. And it just declined to reiterate its full-year revenue growth guidance.
By ERIC JHONSA
Sep 12, 2019 | 02:57 PM EDT
Stocks quotes in this article: ORCL, AMZN, FB, CRM, MSFT

In addition to co-CEO Mark Hurd's leave of absence, the numbers that Oracle  (ORCL) did and didn't share about its current and expected top-line performance appear to be weighing on its stock.

The enterprise software giant's shares are down close to 4% after it missed August quarter revenue estimates, reported in-line EPS and issued below-consensus November quarter guidance on its earnings call. Notably, Oracle also failed to reiterate prior guidance for constant currency (CC) revenue growth for fiscal 2020 (ends in May 2020) to be above its fiscal 2019 growth rate of 3%.

In spite of the lack of full-year revenue guidance, Oracle is maintaining guidance for double-digit fiscal 2020 EPS growth in CC, as EPS continues to benefit from low spending growth and massive stock buybacks. Another $5 billion was spent on buybacks during the August quarter, and Oracle announced it has added a fresh $15 billion to its buyback authorization.

Oracle's post-earnings move is quite different from what was seen in June, when its shares jumped in response to a May quarter beat, roughly in-line August quarter guidance and the reiteration of fiscal 2020 revenue and EPS guidance. Larry Ellison's company is now up 18% on the year, compared with a 23% gain for the Nasdaq and a 20% gain for the S&P 500.

Oracle did have an explanation ready for its August quarter top-line performance: The company noted that its software license revenue, which depends heavily on database sales now that cloud subscriptions account for much of Oracle's application software revenue, were pressured in North America by a sales force reorg. License revenue fell 6% annually to $812 million (below an $865 million consensus), after having risen 12% during Oracle's May quarter to $2.52 billion.

As those numbers indicate, the August quarter is a seasonally weak one for license revenue, and CEO Safra Catz was quick to note that this can result in a small number of closed or missed deals having a big impact on the quarter's growth. Catz added that international license sales were "up quite a bit," and forecast that North American license sales will "more than recover" over the course of fiscal 2020.

Ellison, for his part, indicated Oracle is still seeing strong cloud license activity for its Autonomous Database, which Oracle is banking on to drive database growth as Amazon.com (AMZN)  and other public cloud giants continue seeing strong demand for managed cloud database services relying on non-Oracle databases.

Nonetheless, at a time when total enterprise software spend is believed to be growing at a high-single digit clip, Oracle guided for its November quarter revenue to be flat to up 2% in dollars, and up 1% to 3% in CC. And as noted earlier, the company appears to have pulled a full-year revenue outlook that itself implied limited top-line growth.

To be fair, Oracle's software-related revenue growth should be a little stronger than its total revenue growth, since the company's total revenue also covers its pressured hardware and IT services businesses. Collectively, these businesses accounted for 11% of Oracle's August quarter revenue, and (mostly due to hardware declines) saw their sales drop 6%. But even if these businesses are backed out, Oracle's top-line growth is clearly trailing the broader enterprise software industry's.

In addition to license revenue fluctuations, headwinds for some of Oracle's application software businesses are an issue here. On the call, Catz disclosed that Oracle's "application ecosystem" revenue, which covers cloud subscriptions, traditional app licenses and support revenue related to software licenses, grew 3% in CC to $2.8 billion. That figure appears to imply dollar-based growth of just 2%.

As a result, while Oracle continues reporting strong double-digit growth for its Fusion cloud apps (said to be up nearly 40% last quarter) and its midmarket NetSuite cloud ERP apps (up by a mid-20s percentage), a lot of this growth is apparently being offset by revenue declines for non-cloud application revenue streams. "Apparently" is a key word here, since Oracle stopped breaking out its cloud app (SaaS) revenue last year.

Oracle's app revenue was also pressured some by a low-teens revenue decline for its Data Cloud (marketing data) business, which has been stung by Facebook  (FB) ad data policy changes. And given that the company once more didn't share a revenue growth number for this business, Oracle's cloud CRM software sales might be facing headwinds amid stiff competition from Salesforce.com (CRM)  in the enterprise CRM market, and from Microsoft's (MSFT) Dynamics 365 CRM apps in the midmarket.

With its shares trading for only 14 times expected fiscal 2020 EPS, Oracle is definitely a lot cheaper than many other enterprise software names. But until the company can show something more than low-single digit revenue growth -- and with it, healthy EPS growth that isn't dependent on massive stock buybacks partly financed with debt -- its low multiples look warranted.

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TAGS: Investing | Technology |

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