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Oracle (NYSE: ORCL) reported its third-quarter earnings on March 14. The tech giant's revenue fell 1% (but rose 3% on a constant currency basis) annually to $9.6 billion, narrowly beating estimates by $20 million. Its non-GAAP net income fell 8% to $3.2 billion, but aggressive buybacks boosted its non-GAAP earnings per share 8% to $0.87 per share, which beat expectations by $0.03.
Oracle's stock barely budged after the report, indicating that investors were indifferent to its anemic sales growth and use of buybacks to "buy" an earnings beat. But is this the new norm for Oracle, or is the company merely treading water until other catalysts kick in?
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The key numbers
Oracle's core strategy is to pivot away from its slower-growth on-premise hardware and software businesses toward higher-growth cloud services. Oracle previously disclosed the growth of its cloud service revenues separately.
However, Oracle's cloud services growth decelerated throughout fiscal 2018, and the company stopped disclosing those figures separately in the fourth quarter. Instead, Oracle merged its cloud services with its older businesses in two new segments: the Cloud Services & License Support unit and Cloud License & On-Premise License unit.
That change made it much harder to gauge the strength of Oracle's cloud business. However, the growth of Oracle's two new segments -- which generated 82% of its sales during the third quarter -- remained weak over the past four quarters:
| Metric | Q4 2018 | Q1 2019 | Q2 2019 | Q3 2019 |
|---|---|---|---|---|
| Cloud Services & License Support | $6.8 billion | $6.6 billion | $6.6 billion | $6.7 billion |
| YOY growth | 8% | 3% | 3% | 1% |
| Cloud License & On-Premise License | $2.5 billion | $867 million | $1.2 billion | $1.3 billion |
| YOY growth | (5%) | (3%) | (9%) | (4%) |
Data source: Oracle quarterly reports, on a reported (not constant currency) basis. YOY = year over year.
On the bright side, Oracle noted that its higher-growth Fusion HCM, ERP, Supply Chain, and Manufacturing Cloud applications revenues rose 32% annually during the third quarter, and its NetSuite ERP Cloud applications revenues climbed 30%. Unfortunately, the growth of those newer businesses just wasn't strong enough to move the needle for Oracle, which remains hamstrung by its older database and business software products.
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Moreover, Oracle's top cloud services are still growing at a slower rate than the market-leading cloud services of Amazon.com and Microsoft. In their most recent quarters, Amazon's AWS (Amazon Web Services) revenue grew 45%, while Microsoft's commercial cloud revenues rose 48%. Amazon and Microsoft are also both creeping into Oracle's backyard by integrating database services into their cloud ecosystems.