Cloud computing growth lifts Oracle’s profits, and its shares

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Rapid growth in cloud computing revenues helped lift Oracle Corp.’s fortunes in its third fiscal quarter reported today, as its profits easily beat forecasts on a 2 percent rise in revenues.

The Silicon Valley software giant reported a profit of 69 cents a share before certain costs such as stock compensation, up 7 percent from a year ago. Sales rose 2 percent, to $9.2 billion, or $9.3 billion after backing out the impact of foreign exchange rates.

As in previous quarters, Oracle showed particular strength in two cloud categories: online applications known as software as a service, or SaaS, and platform as a service, or PaaS, a collection of technologies for creating and deploying those applications. In those two areas, Oracle’s revenues shot up 73 percent, to $1 billion, the first time they’ve topped that milestone. The growth was likely helped by Oracle’s $9.3 billion NetSuite acquisition last year, since this is the first quarter after the closing of the deal.

Total cloud revenues, including infrastructure as a service or IaaS, the base-level computing and storage layer dominated by Amazon.com Inc. and Microsoft Corp., rose 62 percent, to $1.2 billion, up 62% in U.S. dollars and up 63% in constant currency. Total cloud and on-premises software revenues rose 4 percent, to $7.4 billion.

“Our pivot to the cloud is now in full swing,” co-Chief Executive Safra Catz said during the earnings conference call. She added that cloud revenue growth has overtaken declines in license revenues, and predicted that in the next fiscal year, cloud revenues will surpass software license revenues.

Analysts on average had expected a 62-cent profit, down about 3 percent from a year ago, on $9.25 billion in revenues, up 3 percent, according to Thomson Reuters. It’s only the second time in the past nine quarters that Oracle has shown year-over-year revenue growth.

Shares on the rise

Investors liked what they saw and Oracle’s shares rose in after-hours trading, nearly by 5 percent after the earnings conference call started. In regular trading Wednesday, shares rose a little under two-thirds of a point, to $43.05. The reaction is a reversal from the second quarter, when Oracle missed expectations despite continued growth in cloud computing as software license revenues fell more than forecast. Update: In Thursday trading, Oracle’s share were rising nearly 7 percent.

The company still depends on sales of licenses for business software such as databases for most of its revenues. But with rivals such as Amazon Web Services and Microsoft Azure getting an early lead in the cloud, often with competing applications, Oracle has been making an aggressive push into cloud computing for the past three years. Co-Chief Executive Mark Hurd last year predicted cloud technologies would constitute 80 percent of information technology budgets by 2025.

Hurd took the opportunity to point out Oracle’s lead over another cloud superstar, Salesforce.com Inc. “Over the last year, we sold more new SaaS and PaaS than Salesforce.com, and we’re growing more than three times faster,” he said in a statement. “If these trends continue … it’s just a matter of when we catch and pass Salesforce.com in total cloud revenue.”

Likewise, Executive Chairman and Chief Technology Officer Larry Ellison (pictured) took more shots at Amazon Web Services, which he had singled out at the annual Oracle OpenWorld conference last fall. He said Oracle’s second-generation IaaS is faster and lower-cost than Amazon Web Services. As a result, he said on the call, “Some of our largest customers are negotiating huge Infrastructure as a Service contracts to move all their databases to the cloud.” He said some such deals will happen in coming weeks.

And now our biggest customers can run their largest and most demanding Oracle database workloads in the Oracle Cloud – something that is absolutely impossible to do in the Amazon Cloud.”

The race to become a force in the cloud isn’t coming cheap, however. Oracle continues to spend big on its cloud computing. Research and development alone grew to $5.1 billion in fiscal 2016, up $2 billion from six years ago, much of the increase from rewriting software for the cloud and creating new cloud services.

Catz set a new, higher fourth-quarter profit forecast of 78 to 82 cents a share on total revenues ranging from down 1 percent to up 2 percent. That includes the expectation that currency “headwinds” will have a 2 percent negative impact on revenues and depress profits by 2 cents a share.

On the cloud front, Catz said Oracle expects SaaS and PaaS revenues to rise 69 percent to 73 percent. IaaS revenues could grow in a range of 25 percent to 29 percent. Over time, she added, gross margins on the cloud business will be about 80 percent.

The company also raised its quarterly dividend by 4 cents, to 19 cents.

Photo: Robert Hof