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Oracle, the world’s largest database software company, has undergone significant transformations over the past decade. A substantial portion of its on-site software has been converted into cloud-based services through initiatives such as the acquisition of NetSuite in 2016 and the expansion of its Oracle Cloud Infrastructure (OCI) platform. In addition, it introduced new cloud-based enterprise resourcing planning (ERP) services like Fusion and acquired healthcare IT giant Cerner (NASDAQ:CERN) last year.
These changes have kept Oracle competitive in the cloud services market, with revenue growth of 4% in fiscal 2021, 5% in fiscal 2022, and 7% in fiscal 2023 (excluding Cerner). CEO Safra Catz attributed this accelerated growth to the company’s cloud applications and infrastructure businesses, which she said grew at a combined rate of 50% in constant currency terms.
However, Oracle’s total cloud services revenue for Q1 2024 was up by only 29% to $4.6 billion, accounting for 37% of its top line. This included a year-over-year growth of 17% to $3.1 billion in its software as a service (SaaS) revenue and a rise of 64% to $1.5 billion in its infrastructure as a service (IaaS) revenue.
Despite these increases, Oracle’s license and support revenue grew only by 12% year-over-year to $9.5 billion in the first quarter, compared to a 25% growth in the fourth quarter. Furthermore, the company’s cloud license and on-premise revenue declined 11% year-over-year to $809 million, while its hardware revenue fell 8% to $714 million.
Oracle’s Q2 2024 forecast anticipates total revenue growth of only 3%-5% year-over-year in constant currency terms and 5%-7% in USD terms. This falls short of analysts’ expectations of an 8% growth in USD terms.
Despite the slowdown in sales growth, Oracle’s adjusted operating margin rose by two percentage points year-over-year to 41% in Q1 2024. The company also continued its tradition of buybacks with $150 million repurchased throughout the quarter. Oracle’s free cash flow (FCF) grew 21% year-over-year to $5.7 billion during the quarter, providing ample room for additional buybacks and dividend hikes.
As a result, Oracle expects its adjusted EPS to grow 5%-9% in constant currency terms and 7%-11% in USD terms in Q2 2024. This is consistent with analysts’ expectations for a 10% adjusted EPS growth in USD terms for the same period.
Despite these promising figures, Oracle’s stock may continue to underperform the market over the next 12 months until its growth stabilizes, the macro environment improves, and its valuations become more attractive.
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