Morgan Stanley: Shallower Cloud Transition May Leave Oracle As Legacy IT Vendor In New Cloud World

Morgan Stanley said though a shallower Cloud transition enables Oracle Corporation ORCL's return to revenue and EPS growth in fiscal 2017, the strategy may leave Oracle as a mainly legacy IT vendor in the new Cloud world. Analyst Keith Weiss, who has an Equal-weight rating and $41 price target on Oracle, noted that declining Software as a Service (SaaS)/ Platform as a Service (PaaS) billings and lower cloud-related capex suggests Oracle's Cloud transition is slowing. In the third quarter, SaaS/PaaS billings growth decelerated to 32% YoY from 68% in the second quarter and capex spend for the full year is expected to be down meaningfully from last year. According to the report, in the most recent quarter, Oracle only spent 15 percent of $368 million total capex on cloud-related expenditures, and company management highlighted that cloud capex will be significantly lower this year compared to last year, which suggests a slowdown in cloud investment and a "cloud shallow" strategy. "Accordingly, our base case is playing out: with FY16 a peak year for SaaS/PaaS billings growth (the revenue peak will lag billings), we expect overall revenue to remain relatively flat and EPS to grow low single-digits in FY17 on improving operating margins (driven by improving Cloud gross margins) and share buybacks," the analyst noted. Weiss added that while a slower cloud transition should ease pressure on near-term margins, he believes this could raise ongoing investor concerns on the company's secular positioning. The analyst highlighted that the refilling of PaaS deferred appears to be lagging and expects billings growth to slow further in the fourth quarter of 2016 and again in the first quarter of 2017. Shares of Oracle were down 0.07 percent at $40.71.