Oracle earnings: Can NetSuite acquisition help win the race against Salesforce?

posted in: Cloud/SAAS, Misc. ERP/CRM | 0

By:  Jeremy Owens

Oracle Corp. managed to win a fight for its acquisition of NetSuite, but that just means ever-combative founder Larry Ellison can gird for other battles.

Oracle ORCL, +0.11%  is scheduled to report fiscal second-quarter earnings after trading closes Thursday, the first quarterly report for the software giant since its $9.3 billion deal for cloud-software company NetSuite passed a shareholder vote in November despite vocal opposition. The addition of NetSuite’s cloud revenue — the company reported total sales of $741.1 million in its most recent fiscal year — could be a big help in Ellison’s goal of beating rival Inc  CRM, -0.29%   to $10 billion in cloud revenue.

With the deal closing in November, the quarterly report will only provide a sneak peek at NetSuite’s contribution to Oracle’s financial performance, but the forecast for the rest of the year and potentially for next fiscal year, if provided, will be interesting. Salesforce Chief Executive Mark Benioff proclaimed last month that Salesforce would surpass $10 billion in cloud revenue in his company’s next fiscal year, though any Oracle forecasts could be more muted.

“If past acquisitions are any guide, Oracle will be quite conservative as it looks to consolidate NetSuite’s revenue and recurring revenue within its financial statements,” Stifel analysts, who have a buy rating on Oracle stock with a $45 price target, wrote in a preview of the report.

Ellison is not just aiming for former protégé Benioff and Salesforce, though. In the keynote address of Oracle’s OpenWorld conference in September, he revealed a new cloud offering meant to rival Inc.’s AMZN, -0.46%   Amazon Web Services division, and more information on that effort could also arrive Thursday.

Here’s what to expect:

Earnings: Analysts on average expect Oracle to report net income of $2.52 billion, or 49 cents a share, with adjusted earnings of 60 cents a share, according to FactSet. Estimize, which crowdsources estimates from analysts, fund managers and academics, is expecting earnings of 62 cents a share. Last year in the same quarter, Oracle reported net income of $2.2 billion, or 51 cents a share, with adjusted profit of 63 cents a share.

Revenues: Analysts polled by FactSet project Oracle will report quarterly revenue of $9.11 billion on average, while Estimize contributors project $9.16 billion. Last year in the same quarter, Oracle reported $9 billion in total revenue.

For the company’s cloud business, analysts expect Oracle to report its first quarter of more than $1 billion in cloud revenue, with an average estimate of $1.05 billion, according to FactSet. In the same quarter a year ago, Oracle reported total cloud revenue of $649 million.

Stock reaction: Oracle stock has declined after earnings in four of the past six quarters, according to FactSet, including after last quarter’s report, when shares fell 4.7% in the next day’s session. Oracle shares were little changed in the past three months as of Thursday morning, trailing the S&P 500’s SPX, +0.54%   5.1% gain in that period, but the two are much closer so far in 2016: Oracle has gained 11.9% year to date, while the S&P is up 10.4%.

A majority of Oracle analysts tracked by FactSet, 20 out of 36, rate Oracle the equivalent of buy, with only three sell ratings. The average price target is $44.35, implying upside of 8.5%.

What to look for: Any forecasts Oracle gives for NetSuite will be watched closely, as well as further color on the challenge to AWS. Most analysts increased their projections for the rest of this fiscal year and the 2018 fiscal year in earnings previews for Oracle.

“We expect the addition of NetSuite and Dyn (not yet closed) to lift FY17 revs by $550m and FY18 revs by $1.0bn,” Karl Keirstead of Deutsch Bank wrote in a representative sample. Deutsch Bank has a hold rating and price target of $40 for Oracle.

Many of the analysts noted that gains from NetSuite could be offset by the strengthening U.S. dollar, as Oracle does more than half its business outside the U.S. Any signs of a slowdown toward the end of the quarter will also be watched closely, as cloud software provider Workday Inc. WDAY, -0.15%  reported that deals suffered around and after the presidential election.

“We see a meaningful risk that Oracle will miss 2Q consensus estimates due to adverse FX,” wrote Wedbush analyst Steve Koenig, who has a neutral rating and $41 price target for Oracle. “Although the demand environment may be somewhat weak in the wake of Brexit and the U.S. election, we think Oracle’s product and market footprint may give it the means to execute adequately (and to draw a contrast with rival Workday on this point).”

Ellison’s challenge to AWS will also be a focal point for analysts, though few expect the bluster of his OpenWorld address to match up to reality.

“In terms of Oracle’s new ‘fight’ with AWS, most investors have (in our view, correctly) come around to a view that Oracle’s ambitions are smaller than AWS, in that it is really building a special-purpose IaaS offering tailored to run Oracle databases,” wrote analysts from Macquarie, which has an outperform rating and $49 price target on the stock.

Despite the strength of AWS, though, Oracle has proven adept at transitioning to the cloud and staying competitive in a fast-changing software sector, which gives analysts and investors confidence that the company will, at the very least, maintain relevance.

“Although Oracle likely faces long-term challenges to its database business based on new application development shifting to AWS, we think the company has many levers to sustain its earnings power in coming quarters and years,” Koenig wrote.