Oracle Earnings Preview: Will Cloud Drive Growth Again?

While it's a generally a quiet time for companies reporting, tech giant Oracle Corporation ORCL is one of the exceptions and it reports earnings for the fiscal second quarter of 2018 after the market closes on Thursday, December 14.

ORCL’s cloud division has been a consistent focus among analysts and CEO Safra Catz has attributed the company’s recent earnings and revenue growth to the results in that division. In the first quarter of fiscal 2018, ORCL reported that total cloud revenues grew 51 percent year-over-year to $1.47 billion, excluding the impacts of foreign exchange.

Within its cloud division, ORCL reported the fastest growth in Software as a Service. Revenue in that division grew 62 percent year-over-year to $1.07 billion. The other two segments of its cloud division, Platform as a Service and Infrastructure as a Service grew 28 percent year-over-year to $400 million. For the second quarter of fiscal 2018, management said they expect total cloud revenue growth somewhere in the range of 39 percent to 43 percent.

Declines in ORCL’s gross margins have also been a focus among analysts. After “narrowing notably over the past few years,” CFRA analysts have said they expect annual gross margin to stabilize around 81 percent through fiscal 2020 due to positive trends in cloud offerings and pricing.

Another area that analysts might be looking for more information is on some of the company’s new product offerings and how those launches are going. In early October, ORCL rolled out an autonomous database cloud that uses machine learning to “eliminate the human labor associated with tuning, patching, updating and maintaining the database.” It also launched a blockchain cloud service.

Earnings and Revenue Estimates for Q2 FY18

ORCL is expected to report $0.68 in adjusted earnings per share (EPS), up from $0.61 in the prior-year quarter, on revenue of $9.55 billion, a 5.3 percent year-over-year increase, according to third-party consensus analyst estimates. Over the past four quarters, ORCL has beat earnings estimates in all of them and beat revenue estimates in three.

Excluding the impacts of foreign exchange, management’s guidance for this quarter is for total revenue growth between 2 percent and 4 percent and non-GAAP EPS between $0.64 and $0.68. Including the impact of foreign exchange, CEO Safra Catz indicated that if rates stayed where they were in mid-September when the guidance was issued, that could have a positive impact of up to two cents on non-GAAP EPS, putting it in the $0.66 to $0.70 range.

FIGURE 1: STUCK IN A RANGE? Oracle gapped down following its last quarterly report in mid-September. Since then, the stock has been trading in a tighter range between $48 and $51. Chart source: The thinkorswim® platform by TD Ameritrade. Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Trading Activity

ORCL, along with much of the tech sector, has had quite the run over the course of 2017, although in recent trading tech stocks have been a little all over the place. The stock started the year in the mid-$38 range and closed at $50.39 yesterday, a 30.71 percent year-to-date increase.

Just before its last quarterly report in September, the stock hit a new 52-week high of $53.14, but shares tumbled to close at $48.74 the day after the company reported earnings. Since then, the stock has been trading in a tighter range between $48 and $51.

Around the upcoming earnings release, options traders have priced in about a 4.6 percent potential share price move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term options trading at the December monthly expiration, there’s been a lot more activity on the call side, concentrated at the 51 and 52 strike prices. On the put side, a majority of the trading has been at the 50 strike, right at the money. As of this morning, implied volatility is on the high end at the 90th percentile.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Looking Ahead

Later today, the Federal Reserve concludes its December meeting and will announce its decision on the target range for the federal funds rate. Make sure to check out today’s market update to my take ahead of the afternoon announcement from the Fed.

Otherwise, we are quickly approaching the end of the year and things have quieted down a little bit. However, there’s still a lot Congress is trying to accomplish before the end of the year in terms of tax reform and the U.S. debt ceiling so we could see some heightened volatility around those events.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.