Oracle quotes may rise to $83.4 per share.
Oracle (ORCL) reported for the third quarter of 2021. Oracle’s results look less confident in the context of accelerated growth in the previous reporting period.
At the same time, management gave a strong forecast for the full fiscal year. The issuer’s revenue grew by 4% YoY, which was at the level of initial management estimates, but 0.3% lower than the consensus forecast. Excluding the effect of exchange rates, sales increased by only 2%. Diluted non-GAAP EPS increased by 10.7%, exceeding market expectations by 6%. The business segment “Cloud services and licensing support” grew by 6% against an increase of 8% in the last quarter. In annual terms, sales of all cloud solutions (SaaS plus IaaS) amounted to $10 billion, or 25% of the total LTM revenue.
The segment’s sales dynamics have traditionally by crucial cloud solutions: Fusion apps (+26%), Fusion ERP (+30%), NetSuite ERP (+26%). Among the new large clients of ERP solutions, Oracle CFO noted Bank of America, Macquarie, Humana Vanguard (partially). Sales of applied products amounted to $3 billion. Revenue from infrastructure solutions increased by 3% to $4.3 billion. The cloud infrastructure products sub-segment (includes IaaS and self-managed databases) increased by 80% YoY. The database sub-segment expanded by 6%.
The CFO noted the strengthening of the issuer’s position in this direction: the new generation of MySQL from Oracle now includes a new query processor in HeatWave memory and a new AutoPilot management dashboard. In addition, Oracle estimates that HeatWave is 100 times faster than Amazon’s Aurora counterparts and ten times more productive than RedShift or SnowFlake engines.
The licensed segment lost 8% amid customers’ continued transition to cloud products. The hardware solutions segment decreased by 6% YoY, which can be considered a fragile result against the background of the growth of Dell’s similar direction (+3%, server solutions increased by 6%). Oracle’s non-GAAP operating margin remained at the level of last year and amounted to 45%.
A lower level of the effective tax rate (18%) and a share buyback of $8 billion positively impacted the dynamics of non-GAAP EPS. In addition, a significant positive aspect of the quarterly conference call was the strong management forecast for the full fiscal year (ending in May 2022). Following the new guidance, revenue growth will accelerate to 4-6% against the background of an increase in the share of cloud solutions in the business structure. In addition, the CEO said that he expects the growth rate of cloud solutions to remain at 25% until the end of the fiscal year.
It is also important to note that the obligations increased by 10% at the end of the quarter to $38.7 billion, and gross deferred revenue increased by 5%. In addition, the forecast for the next quarter remains the same: sales growth at the level of 3-5%, non-GAAP EPS – at the level of 2-6%. Therefore, we evaluate Oracle’s results neutrally positively; the growth rate decreased compared to the second quarter’s data. At the same time, management gave a strong forecast for the full fiscal year, and the growth momentum of cloud solutions (including infrastructure cloud products) remains high.
There is no noticeable pressure on the operating margin. As a result, we raise the target price for ORCL shares to $83.4 per paper.
