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Stock Analyst Update

Oracle's Cloud Growth Sputters

The wide-moat firm will begin to face a series of tough compares as they lap quarters that are fully inclusive of NetSuite.

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 Oracle (ORCL) reported fiscal third-quarter results that were roughly in line with our muted expectations, as the firm continues to see sputtering cloud growth. Although management continues to tout the success of its bring-your-own-license, or BYOL, business, we question how durable a strategy this will serve in the long run, given the strong demand environment for traditional cloud services across the spectrum of SaaS, PaaS, and IaaS. Management’s outlook suggests more of the same in the fourth quarter, and Oracle will begin to face a series of tough compares as they lap quarters that are fully inclusive of NetSuite. We are maintaining our wide moat and negative trend ratings. The positive impacts of raising our near-term license revenue expectations and a slightly lower long-term tax rate are offset by a lower medium-term outlook for cloud revenues, resulting in no change to our $46 fair value estimate. Shares are retreating roughly 7% on the heels of these results, and appear fully valued.

Third-quarter GAAP revenue rose 6% to $9.8 billion, modestly ahead of our expectations. The composition of the top-line beat was mostly attributable to license revenue, which continues to buck a multiyear trend of double digit declines, falling just 2% to $1.4 billion. As a result, maintenance revenue remains strong, up 6% in the quarter to roughly $5 billion. However, the firm’s cloud growth engine continues to moderate. GAAP SaaS revenue rose 33% versus the prior-year period to $1.15 billion, as management continues to suggest that BYOL sales are largely to blame for the slowdown. Encouragingly, adjusted SaaS gross margins have maintained their upward trajectory, though the pace of expansion slowed to just 200 basis points in the third quarter, reaching 67%. Adjusted operating margin expanded 140 basis points to 43.9%.

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Rodney Nelson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.