Wall Street's Reaction To Oracle's Q2 Ranges From Cautious To Optimistic - Oracle (NYSE:ORCL)

Shares of Oracle Corporation ORCL were trading lower by more than 3.5 percent Thursday following the company's second quarter print on Wednesday.
Oracle earned $0.63 per share on revenue of $9 billion. Wall Street analysts were looking for an earnings per share of $0.60 on revenue of $9.06 billion.
Wall Street analysts were mixed following the print.

Here is a roundup of what some of Wall Street's top analysts were saying following the print.

Credit Suisse: Acceleration ‘Coming Into View'

Philip Winslow of Credit Suisse pointed out that that despite a lower-than-expected hardware revenue of $1.123 billion (versus a consensus estimate of $1.215 billion), Oracle's PaaS/SaaS bookings grew 68 percent year-over-year in the quarter after growing 70 percent in the first quarter.

Oracle announced 857 new SaaS customer gains and 1,343 new PaaS customer gains – outpacing the 862 and 161 gains the company booked in the same quarter a year ago, respectively. The analyst noted that these metrics serve as "further evidence" of the company's "cloud traction" and should result in an acceleration of revenue.

Winslow added that Oracle's management expects its SaaS/PaaS gross margins to expand from 43 percent in the second quarter and approach 60 percent in the fourth quarter. Accordingly, the improving cloud business, coupled with a "steady" on premise software business reinforces a bullish stance on the company.

Finally, Winslow argued that Oracle can also benefit from several drivers, including: 1) further improvements in sales force productivity, 2) adoption of the In-Memory option, 3) increased customer traction of cloud applications, and 4) the market opportunity for Engineered Systems.

Shares remain Outperform rated with an unchanged $50 price target.

Wedbush: Any Improvement ‘Will Be Mild'

Steve Koenig of Wedbush commented in a note that Oracle's "somewhat mixed" second quarter print was highlighted by a revenue miss while its earnings per share beat due to a lower tax rate. Nevertheless, the analyst stated that the headline results were "fairly solid" although some of the supporting metrics and aspects of guidance "were a bit disappointing."

Koenig continued that Oracle's cash flow from operations was "weak," net billings fell 8 percent year-over-year, and the company's guidance "doesn't imply any raise" to its full year SaaS/PaaS outlook. In addition, the third quarter revenue guidance (around $9.125 billion at the midpoint) was below the consensus estimates.

Morgan Stanley: Confidence EPS Growth Will ‘Rebound'

Keith Weiss of Morgan Stanley commented in a note that following Oracle's second quarter print, investors "must weigh a positive tone" from management at a time when the company is "suffering thru the negative impacts" of its cloud transition.

Weiss said there are a plethora of cloud offerings and "it may be a fool's errand to try and find a simple X-to-Y ratio" to evaluate the cloud transition. The analyst did however add what is known is that the company added $475 million in SaaS/PaaS ARR bookings in the first half of the fiscal year while at the same time licenses revenues declined by $587 million and hardware revenues fell $152 million.

Weiss added that at a 1.9x-2.0x ratio for lost on premise revenue to new cloud ARR implies Oracle will garner approximately 70 percent more revenues from Cloud customers over a 10-year time span.

On the other hand, Weiss suggested that is "a bit less clear" to what degree Oracle will compete against cloud platforms like Amazon Web Service and Azure. The analyst added that "truly competing" with the cloud giants may require "significantly higher" capex investments. As an example, Microsoft has spent around $15 billion in capex investment in building their cloud infrastructure versus Oracle's less than $4 billion in total capex over the past 5 years.

Bottom line, as Oracle shifts its clients towards the cloud, it is "inevitable" that cloud revenues will grow accordingly. What investors are looking for is sufficient proof that the transition will add value to Oracle – and the evidence "remains sparse" in the second quarter. Nevertheless, the analyst has confidence that the company's earnings per share growth will "rebound."

Shares remain Equal-weight rated with an unchanged $45 price target.

FBR: Results ‘Better Than Feared'

Speaking to Benzinga, FBR & Co.'s analyst Daniel Ives said that Oracle's results were "better than feared." The analyst added that Oracle's cloud segment was a "relative standout" although "massive changes remain ahead" given its mature database business which remains "under pressure."

Elsewhere On The Street

Analysts at Barclays maintained an Overweight rating with an unchanged $48 price target.

Analysts at FBR & Co. maintained a Market Perform rating with a price target lowered to $41 from a previous $44.

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