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Shares of Oracle (NYSE: ORCL) recently tumbled after the tech giant posted mixed first quarter numbers and soft revenue guidance. Oracle's revenue rose just 1% annually (2% on a constant currency basis) to $9.19 billion, marking the company's slowest growth in seven quarters.
The company expects that sluggishness to persist with flat to 2% sales growth (on a constant currency basis) during the second quarter, blaming a "tough comparison" to the prior year quarter's 5% constant currency sales growth.
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However, Oracle's non-GAAP EPS still rose 18% to $0.71. Its GAAP earnings also climbed 13% to $0.57 per share.
Oracle doesn't seem doomed, and the stock seems pretty cheap at about 14 times next year's earnings. But the company also isn't giving investors much to look forward to, and the stock has been stuck in neutral over the past year. Let's dig deeper into Oracle's business to identify the key problems.
Oracle's "cloudy" business model
Over the past few years, Oracle has pivoted away from its slower-growth on-premise businesses (like database hardware and software) toward its higher-growth cloud services. Until the third quarter of 2018, Oracle clearly identified these businesses as SaaS (software as a service), IaaS (infrastructure as a service), and PaaS (platform as a service) products.
The growth of its SaaS unit slowed down dramatically throughout fiscal 2018, raising concerns that Oracle couldn't keep pace with its primary rivals Amazon (NASDAQ: AMZN), Salesforce, SAP, and Workday.
| Q4 2017 | Q1 2018 | Q2 2018 | Q3 2018 | |
|---|---|---|---|---|
| SaaS | $1 billion | $1.1 billion | $1.1 billion | $1.2 billion |
| YOY growth | 75% | 62% | 55% | 33% |
| IaaS/PaaS | $403 million | $400 million | $396 million | $415 million |
| YOY growth | 42% | 28% | 21% | 28% |
Cloud revenue growth. Source: Oracle quarterly reports.
But in the fourth quarter, Oracle stopped disclosing those revenues separately and bundled them with its legacy businesses under the far more opaque "Cloud Services and License Support" and "Cloud License and On-Premise License" units.
Many analysts believed that Oracle made that change to reduce investor scrutiny of its cloud services growth. Nonetheless, a comparison of Oracle's fourth and first quarter sales growth reveals the same slowdown under more opaque reporting methods.
| Q4 2018 | Q1 2019 | |
|---|---|---|
| Cloud Services and License Support | $6.8 billion | $6.6 billion |
| YOY growth | 8% | 3% |
| Cloud License and On-Premise License | $2.5 billion | $867 million |
| YOY growth | (5%) | (3%) |
Source: Oracle quarterly reports.