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Earnings preview: Oracle braces for mixed Q4 amid cloud transition woes

Shares of software giant Oracle (NYSE: ORCL) hovered near the peak once again this week, after retreating from last month’s record high. With the next earnings report due on Wednesday evening, speculation is rife that the uptrend will continue. The stock’s movement in the coming days might also be influenced by the management’s full-year outlook.   

Analysts’ consensus earnings estimate for the fourth quarter is $1.07 per share. It represents an 8% increase from last year and is in line with the long-term trend of positive earnings, mainly reflecting the continuing improvement in operational efficiency. Revenues, meanwhile, are expected to decline by 2.7% to $10.95 billion in the fourth quarter.

Oracle Q3 revenue down 1%

Sales under pressure

As the estimate for the to-be-reported quarter suggests, Oracle’s sales remain under pressure even as the company continues its transition from conventional computing to the cloud space. The shift in business model keeps posing challenges, in terms of revenue performance. In the long term, cloud adoption is expected to bring major returns, mainly in the form of a top-line turnaround.

Oracle’s sales remain under pressure even as the company continues its transition from conventional computing to the cloud space

The performance of all the three segments, software-as-a-service, platform-as-a-service, and infrastructure-as-a-service, has been unimpressive in the past several quarters, which restricted the top-line growth to the minimum last year. The case of software licensing, which accounts for nearly 20% of total revenues, is the same.

Related: Oracle Corporation Q3 2019 Earnings Conference Call Transcript

Nevertheless, the market is upbeat about the management’s extensive stock repurchase program, under which around $28 billion of shares were repurchased so far this year using a significant portion of the available cash. Additional buybacks are in the cards going forward. But, the strain on liquidity could be a hassle when the company takes up capital-intensive expansion initiatives like acquisitions, to complement the ongoing transition.

Looking back

Though the core cloud services revenue edged up 1% in the third quarter, it was more than offset by negative growth in the other segments, resulting in a 1% dip in total revenues to $9.61 billion. Lower costs and favorable tax rates saved the bottom-line, which rose 8% to $0.87 per share.

Microsoft partnership

Oracle’s recent cloud partnership with Microsoft (MSFT) has brought cheer to investors, though a section of analysts prefer to wait and see to what extent the company is going to benefit from the tie-up.

When it comes to the balance sheet, the cash position weakened in recent years while debt increased steadily and crossed $55 billion last year. Oracle’s stock has gained 17% in the past six months and 21% since the beginning of the year.

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