uploads///REVENUE AND MARGINS

The Cloud’s Role in Oracle’s Margin Expansion in Fiscal 1Q18

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Oracle reported its highest revenue growth in last 13 quarters

So far in this series, we’ve discussed Oracle’s performance in fiscal 1Q18. Like its enterprise software peer IBM (IBM), Oracle (ORCL) was finding it difficult to see revenue growth. However, with its increased focus on the cloud space, Oracle has made a turnaround. 

Not only did Oracle post its fifth straight quarter of positive revenue growth in fiscal 1Q18, its revenue growth of 7% was its highest growth in the last 13 quarters.

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Margin performance

Although Oracle is still in a transitional phase of shifting its operations from license sales to subscriptions, the increased traction of its cloud offerings indicate that the company is well on its way to becoming a cloud company in the near future. 

The company’s SaaS revenue growth has encouraged analysts to have a positive view on Oracle stock, as its SaaS revenues are viewed as more predictable than licensing revenues. This trend could explain the increased preference among software companies for subscriptions.

Oracle’s SaaS gross margins have been improving, with margins of 67% in fiscal 1Q18 compared to 59% in fiscal 1Q17. However, the company’s PaaS and IaaS gross margins fell from 58% in fiscal 1Q17 to 44% in fiscal 1Q18.

Oracle’s IaaS and PaaS business, which was combined in fiscal 4Q17, is currently in an expansion mode as its expenses are incurred upfront. Its revenues are recognized only when the software services are delivered. The timing of revenues and expenses are misaligned in the cloud business, which impacts its margins and cash flows.

As the chart above shows, Oracle’s net margins fell on a sequential basis in fiscal 1Q18. However, on a year-over-year basis, its net margins improved in fiscal 1Q18 on the back of improvement in its SaaS margins. Oracle noted that its SaaS margins could “possibly” hit 80% by fiscal 2019.

Sharing the company’s expectations of expanded margins, Safra Catz, Oracle’s co-CEO, stated, “We expect to see further improvement in FY 2018 and remain committed to our goal of 80% SaaS gross margins, possibly as soon as sometime in FY 2019.”

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