Oracle (ORCL) delivered second-quarter results that modestly outstripped our expectations from a total revenue and earnings perspective. However, Oracle’s IaaS/PaaS business delivered paltry results, while management offered a middling growth outlook for the firm’s consolidated cloud business. We maintain our view that Oracle’s convoluted IaaS/PaaS stacks up poorly with rivals such as Amazon and Microsoft, and we continue to view management’s five-year target of $10 billion in annual IaaS/PaaS as unrealistic in our base case. We are maintaining our wide moat rating and $46 fair value estimate. Shares are retreating more than 7% on the heels of these results and have fallen nearly 17% since mid-September, but we think investors should seek a wider margin of safety before investing in the name.
Second-quarter revenue rose roughly 6% from the prior-year period to $9.6 billion, ahead of our estimate. The revenue beat was largely characterized by greater-than-expected license sales, driven in part by Oracle’s bring-your-own-license, or BYOL, model where customers can renew licenses and bring software to Oracle’s public cloud offering. While this is a short-term victory for Oracle, we question how effective the BYOL model will be long term. By and large, moving technologies to the cloud is viewed as a cost savings initiative, but considering Oracle’s stated effort to upsell BYOL customers to subsequent licensing add-ons such as autonomous database while continuing to enforce maintenance contracts, it is unclear if customers will in fact generate any savings deploying its software in this manner. While management insists that providing customers as much variety as possible is a positive, our long-term concern is that this strategy further opens the door for native SaaS vendors such as Salesforce and Workday to make inroads into Oracle’s customer base.
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