Oracle: 30% cloud revenue growth, but Cerner worried about stalling growth

Oracle’s share price fell 12% earlier this week, the biggest amount since 2002, compared with a 15% decline in the stock as the dot-com bubble burst across the tech sector. happened. While the overall tech sector is up in 2023 and some stocks are making huge gains due to the tailwinds of AI, technology giants like Oracle are coming under fire as less astute commentators are making uncritical assessments, on which market participants react. Are giving.

by numbers

Oracle said total revenue rose 9% to $12.45 billion, essentially matching estimates of $12.47 billion. The context here is that Oracle missed consensus estimates by $20 million, which is the equivalent of an enterprise deal that fell out of the quarter, which could have been by hours. The market’s commentary is not correct, but a more nuanced and considered approach needs to emerge.

That 9% topline growth was driven by a 30% increase in cloud revenue to $4.6 billion, including a 66% increase in cloud infrastructure to $1.5 billion and a 17% increase in cloud applications to $3.1 billion. increase was included. These numbers mean that Oracle is gaining market share against companies like AWS, Google, and Microsoft. For a mature, long-standing business like Oracle, this ‘Rule of 40’ level of growth is a key indicator that Oracle’s strategy is resonating with customers and that sales teams are executing at scale.

Importantly, Oracle was also able to demonstrate that profit margins increased modestly in the quarter, with adjusted operating income improving 13% to $5.1 billion and adjusted operating margin reaching 41%. Then a 13% increase in operating income in a mature business is a key indicator that Oracle is growth-focused and executing operationally. Further evidence came from EPS performance, which jumped 16% to $1.19, beating estimates of $1.15.

Commenting on the earnings, CEO Safra Catz said, “Oracle Cloud Infrastructure revenue grew 66% in Q1, much faster than our hyper-scale cloud infrastructure competitors” and said of its cloud services business, ” This highly predictable, highly profitable recurring revenue stream – combined with continued expense discipline – led to 16% growth in non-GAAP earnings per share, 21% growth in free cash flow, and $7.0 billion in operating cash flow in Q1. increased.

What spooked the market?

Despite the solid results, the company was pragmatic about second-quarter revenue growth, estimating 5% to 7% top-line growth to $13 billion, slightly below the $13.29 billion consensus. The market overreaction was due in part to the pace of the transition at Cerner, a market-leading health care IT company that Oracle acquired last year and is currently in the midst of transitioning to the cloud. The Cerner acquisition is a long-term strategic play for Oracle to dominate the highly regulated industry with a market-leading electronic patient records platform. Healthcare has been notoriously slow to adopt public cloud, so the pace of transition here is right in line with broader trends in the market.

Oracle’s selloff following the earnings announcement seems to be more a reflection of high expectations and overreaction to the stock than anything else, especially when it comes to AI. Prior to this recent announcement, shares were up more than 50% ahead of the results.

Like every other vendor, Oracle is also actively promoting the benefits of integrating artificial intelligence into its operations. In the recent quarter, the company introduced AI enhancements to its Fusion Cloud and human capital management software. “To date, AI development companies have signed contracts to purchase more than $4 billion of capacity in Oracle’s Gen2 cloud,” Larry Ellison said in the earnings statement, highlighting a key milestone in last quarter’s data. represents a twofold increase from. , Although this is a positive growth indicator for Oracle, it has not yet been fully reflected in last quarter’s results. This will change in the coming quarters as AI and the innovation that Oracle is bringing to the market will be more broadly reflected in bottom-line performance.

looking ahead

Ultimately, I am bullish on Oracle’s market position and ability to capitalize on the prevailing buzz around AI. As AI deployments become widespread across large enterprises, Oracle is well-positioned because of two factors: data-centricity and mission-critical applications. While the database market has been revolutionized and Oracle is less dominant than it once was, the company continues to innovate with technologies like MySQL Heatwave and the amount of data in Oracle’s various database platforms is significant. This data-centricity in the Oracle platform will enable the company to benefit from AI projects at scale in the coming months.

The second factor is mission-critical apps, Oracle has a huge footprint of mature, highly adopted enterprise apps that dominate certain sectors like retail and healthcare. While Cerner’s movement into the cloud is not happening as rapidly as Oracle had hoped, the ability to enhance Cerner with AI-powered solutions will prove beneficial for Oracle in the medium to long term.

This short-term bounce in the path of Oracle’s valuation is largely an overreaction driven by a small miss in topline revenue and pragmatic guidance around Cerner’s transition to the cloud. Over the next few quarters, I fully expect Oracle to once again be the outperformer as the company has strong core values, an active innovation engine, and a loyal and diverse range of customers who have built their corporate infrastructure across Oracle platforms. A significant percentage of the data. deployment