Although the wide-moat company has a chance to offer a unique, differentiated service against incumbents such as Amazon and Microsoft and up-and-comers such as Google, it is several rungs below these firms in terms of a marketable strategy, capacity, and revenue contributions.
By Rodney Nelson | 12-15-16 | 11:45 PM | Email Article

 Oracle  reported second-quarter results that were relatively in line with our expectations, as rampant cloud revenue growth continues against declines in traditional software license sales. More importantly, management provided us with some insight into how they plan to pursue its public infrastructure-as-a-service opportunity, including a ramp in capital expenditures this year as data center buildout increases. Although we think Oracle has a chance to offer a unique, differentiated service against incumbents such as Amazon and Microsoft and up-and-comers such as Google, we believe the company is several rungs below these firms in terms of a marketable strategy, capacity, and revenue contributions. We are maintaining our wide moat rating and $38 fair value estimate after baking in these new assumptions, and we continue to view the shares as fully valued today.

Rodney Nelson is a senior equity analyst for Morningstar.

Second-quarter revenue was relatively flat versus the prior-year period at $9 billion, as 81% growth from the SaaS and PaaS business was entirely offset by a nearly 20% decline in new software licenses. We expect this dynamic to persist, though we believe the cloud business is nearly large enough to more than offset declines in software licenses, ultimately generating growth in the long run. Our larger concern revolves around the pace of software license declines; eventually, enough customers will migrate to the cloud (or switch software providers) such that Oracle will begin seeing declines in its maintenance and support revenue, which contributed roughly 85% of gross profit dollars in fiscal 2016. Still, we were heartened to hear that maintenance renewal rates remained strong in the quarter, suggesting this impact is not being felt just yet. The recently-acquired NetSuite business contributed roughly $50 million in revenue to the SaaS business in the quarter, but we expect NetSuite’s quarterly revenue contributions to increase significantly over the remainder of Oracle’s fiscal 2017.

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