uploads///Oracles revenues and margins

SaaS, PaaS Playing a Role in Oracle’s Growing Net Margins

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Oracle’s struggle to report revenue growth continues

With each passing quarter, Oracle (ORCL), like IBM (IBM), is finding it difficult to see revenue growth. In the past ten quarters including fiscal 1Q17, Oracle’s revenues have missed analyst expectations nine times.

Salesforce (CRM), however, continues to be an exception, reporting 25% YoY (year-over-year) revenue growth in fiscal 2Q17. CRM’s recent acquisitions are likely to provide a boost to its double-digit revenue growth.

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But Oracle is still in a transitional phase, shifting its operations from license sales to subscriptions. As a result, there has been a steady decline in its new software license revenues. SaaS (software-as-a-service) revenues are usually more predictable than licensing deals, which is why they are increasingly preferred by software companies.

Still, software companies like Microsoft (MSFT), Oracle, and IBM have found this shift to be complicated because these companies are accustomed to huge revenues through large deals.

Improvements in SaaS and PaaS margins

As the chart shows, net margins in the first quarter of the fiscal year are usually lower than in the rest of the fiscal year. But on a YoY (year-over-year) basis, Oracle’s net margins improved in fiscal 1Q17 on the back of improvement in SaaS and PaaS (platform-as-a-service) margins.

Oracle stated that its EPS (earnings per share) in fiscal 1Q17 felt a negative impact from increased borrowing and the higher tax rate on increased cloud sales in the US. The strengthening US dollar (UUP) has also impacted Oracle’s EPS.

Oracle posted not only strong growth in cloud revenues but also margins. In 1Q17, the gross margin for SaaS and PaaS stood at 62%, as compared to 40% in 1Q16. Oracle expects to see further improvements in cloud margins and expects 80% cloud margins in the future.

You might consider investing in ETFs like the SPDR S&P 500 ETF (SPY) to gain exposure to Oracle, which makes up 0.7% of SPY. Investors seeking application software exposure can also consider SPY. Application software makes up ~7% of the fund.

Now let’s discuss Oracle’s cash flow and dividends.

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