Oracle Needs To Slow Licensing Declines, Continue Solid SaaS Growth

Oracle Corporation ORCL is scheduled to release its FQ3 2017 results Wednesday and is expected to report a sequential license improvement.

MKM Partners’ Kevin Buttigieg said Oracle would be able to generate EPS growth in FY2018 only if it can slow license declines and continue solid SaaS growth. He maintained a Neutral rating on the stock, with a $42 price target.

Expectations For The Quarter

Oracle is expected to report a 16 percent year-over-year decline in license revenue, representing an improvement over the previous quarter’s 19 percent year-over-year decline, despite a 100 basis point higher comp.

“ORCL does not expect license declines to continue at the F2Q pace as app licenses are becoming a smaller portion as more shift to the cloud. ORCL expects the database cloud transition to be less pronounced as some customers will continue paying license & support in addition to a cloud hosting fee, in contrast with apps SaaS where most customers discontinue license/support,” Buttigieg wrote.

Related Link: BMO Lowers Oracle Estimates, Stays Bullish

Impact Of NetSuite

FQ3 2017 would be the first full quarter with NetSuite Inc N. The analyst expressed concern regarding “the high degree of functional overlap” between Fusion ERP and NetSuite being confusing for customers.

FQ4 Projections

There are investor concerns around Oracle being able to meet its FQ4 license guidance, after the company highlighted its cloud transition has the maximum license dampening effect in the seasonally strong fourth quarter.

EPS Growth

Oracle’s shares have gained 11 percent year-to-date, outperforming the NASDAQ, which is up 9 percent, and the S&P500, which is up 6 percent.

“We believe this is around the anticipated improvement in EPS growth in FY18 as ORCL moves past the most negative impacts of its cloud transition. For this to happen, ORCL needs to see less negative licenses and continuing strong SaaS revs…[W]ith the apps transition largely done, growth would likely have to come more from [SaaS] share gains,” Buttigieg stated.