Oracle's Competitive Position Is Improving, Cloud Continues To Strengthen

Oracle Corporation ORCL reported FQ2 2017 revenue modestly short of consensus expectations, mainly due to currency headwinds. While cloud strength continues, the company’s competitive position is improving.

DA Davidson’s Jack Andrews maintained a Buy rating on the company, with a price target of $52.

Oracle reported quarterly revenue at $9.070 billion, marginally missing the consensus of $9.107 billion. Forex had a negative impact of 1-2 percent on total revenues. Non-GAAP EPS came in at $0.61, above the Street expectation of $0.60.

Cloud Strength Continues

SaaS and PaaS revenue growth came in at 87.3 percent year-over-year, ahead of the prior quarter’s 80.3 percent growth, “which marks the eighth quarter in a row of growth acceleration,” Andrews noted. Bookings grew 31 percent. The company added 1,082 new SaaS and 2,225 new PaaS customers in the quarter.

SaaS & PaaS gross margin expanded ~1,700bp year-over-year to 61 percent, and management expects gross margins to expand to 80 percent in the longer term.

Improving Competitive Position

The latest IDC report indicated that Oracle has surpassed salesforce.com, inc. CRM to become the leading provider of SaaS cloud applications to enterprises with more than 1,000 employees.

Management believes that with the addition of NetSuite Inc N, Oracle is “much better positioned to become the number one cloud applications provider for companies with less than 1,000 customers as well,” Andrews mentioned.

Sentiment To Improve

The analyst expects sentiment to improve as Oracle’s shift to the Cloud continues to accelerate and management’s projection of double-digit non-GAAP EPS growth for FY2018, “which is a notable reacceleration from the decline that we have seen over the past three years, including our projection for FY2017.”