Oracle's Cloud Shift Seems to Be Working

Last Thursday, Xerox Holdings Corp. XRX and Oracle Corporation, ORCL announced a multi-year deal that will provide cloud-computing infrastructure and software for use by ventures developed in Xerox's business incubator. With its latest fiscal second-quarter earnings report, Oracle topped both top and bottom-line expectations with its quarterly guidance meeting consensus. However, payment of a judgment in a decade-long dispute with HP Inc HPQ involving former CEO's recruitment somewhat spoiled the earnings picture but it was still an overall good quarter with Oracle's stock having its second-best day in two decades upon the results, making co-founder Larry Ellison the world's fifth-richest person, according to Forbes, surpassing Alphabet Inc GOOG-owned Google co-founders, Larry Page and Sergey Brin.

How Could Oracle's Co-Founder Surpass Google's?

This comes as somewhat of a surprise as Google, Amazon AMZN, and Meta FB have been experiencing skyrocketing growth in the near past while Oracle followed the curve with merely single-digit growth. But the latest results are showing signs of acceleration, giving investors heightened confidence that it is transitioning successfully to the cloud.

Fiscal Second Quarter Results

For the quarter ended on November 30^th, the software and hardware maker's revenue increased 6% YoY but the company swung to a net loss of $1.25 billion from net income of $2.44 billion in the year-ago quarter due to a payment for a judgment in a decade-long dispute stemming from 2010 when former CEO Mark Hurd arrived and became co-CEO alongside Safra Catz until he died in 2019, leaving Catz in charge. Non-GAAP profits rose 14% compared to last year's comparable quarter or $1.21 a share, slightly ahead of $1.11 that Wall Street expected. But, this profit sways to a loss of 46 cents per share under generally accepted accounting principles.

Cloud service and license support were $7.55 billion, up 6% YoY and slightly above the StreetAccount consensus of $7.54 billion. Cloud license and on-premise license revenues rose 13% to $1.24 billion, also topping the consensus that stood at $1.07 billion.

Infrastructure and applications cloud business saw its revenue grow 22%. Fusion ERP which is financial software that serves large businesses saw its revenue grow 35% while NetSuite ERP that serves smaller customers was slightly behind with 29% growth. The HR software application, Fusion HCM, also rose 25%. Oracle Cloud Infrastructure consumption revenue grew 86%.

Short-term deferred revenue of $7.9 billion came below the $8.29 billion consensuses.

Fiscal Third Quarter Guidance

Adjusted earnings per share are expected to be between $1.14 to $1.18 with revenue growth in the range between 3% and 5%. Analysts polled by Refinitiv had expected adjusted earnings of $1.16 per share and $10.56 billion in revenue, which would imply about 5% revenue growth.

News

Oracle announced a new $10 billion stock repurchase authorization. In the quarter, the company bought back $7 billion of stock, repurchasing 47% of its stock at an average price about half of the current level during the past decade.

Overall, A Fantastic Quarter.

Despite a currency headwind of $100 million in revenue and a penny a share in profits, results ended up being better than expected, confirming that Oracle's cloud shift is on track.

According to Catz, fiscal 2022 revenue growth is accelerating compared to fiscal 2021 due to cloud business growth being in the mid-20 percentage range and accelerating in the undergoing quarter.

Oracle Has What Xerox Needs

Xerox is trying to go beyond its flagship printers and copiers by fast-tracking the development of new enterprises, be it business units, startups, subsidiaries, or joint ventures. Its goal is to develop businesses offering a range of products and services focused on 3-D printing, industrial IoT, and sustainable tech, among other emerging technologies. These are areas it has identified as having strong potential for fast growth. Xerox aims to create the agility to compete with all the startups around the world in these different sectors and it is tapping Oracle's cloud services to provide these businesses with a digital backbone: e-commerce platforms, finance and accounting, budgeting and financial planning, analytics, and a data warehouse and many other tools.

Xerox needs Oracle's help to innovate faster than smaller, more agile tech startups. It already used Oracle's cloud services to create its own software business within the company, CareAR, which was launched in September. It is an augmented-reality platform designed to enable technicians to provide remote tech-support services using smartphones, tablets, or smart glasses.

Oracle has the speed that Xerox needs as its cloud infrastructure and business apps are designed to be deployed quickly and with ease with a new 3-D printing business launched in February taking only six weeks as opposed to three months to set up IT systems and cloud infrastructure.

Outlook

For the fiscal third quarter, growth is expected to be between 6% to 8% in constant currency, or 3% to 5% as reported. Profits are expected in the range between $1.19 to $1.23 in constant currency or $1.14 and $1.18. Currency headwind in the quarter is expected to amount to 3% for revenue and 5 cents for earnings per share. During the reported quarter, Oracle announced it will be opening cloud data centers in Colombia, Israel, Italy, France, Mexico, Singapore, South Africa and Sweden, implying its sustained cloud momentum is set to continue.

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