Margins Could Become A Point Of Emphasis
Sans restructuring costs Oracle’s operating income margins were 35% last quarter – the same as the previous year’s. I would expect margin improvement in cloud services to spur total operating income. That thesis may not play out as expected. Operating income margins for Cloud SaaS was 65%, up from 56% in the year earlier period. However, margins for Cloud PaaS was 39%, down from 52% in the prior year period. This likely connotes stiff competition and deteriorating pricing in cloud platform and infrastructure segments. Oracle has to compete with the likes of Amazon (AMZN) in the space; as more companies seek to provide cloud services, pricing could deteriorate and growth could come at the expense of margins.
Cash Flow
Through the first six months of the fiscal year Oracle generated operating cash flow of $7.4 billion. This equates to an annual run-rate of over $14 billion. The company also has cash and marketable securities of over $70 billion. This cash hoard positions Oracle to make acquisitions in the future. A few Fed rate hikes this year could drive down global markets. In six to nine months I expect valuations of publicly-traded technology companies to fall. That could set the stage for Oracle to make value-added acquisitions that could spur its top line growth.
Conclusion
Oracle’s cloud services will likely show strong growth this quarter. ORCL is up 16% Y/Y, in line with the performance of the S&P 500 (SPY). If financial markets turn down it could take ORCL with it. I rate ORCL a hold into earnings.
