Shares of the database company Oracle Corp. took a pounding in after-hours trading today as the company reported sales that missed expectations and provided lighter revenue guidance than analysts had hoped.

The company reported net income of $2.42 billion in its fiscal 2024 first-quarter results, rising from $1.55 billion a year earlier. Earnings before certain costs such as stock compensation came to $1.19 per share, ahead of Wall Street’s target of $1.15 per share.

However, the higher profitability failed to soften the blow of Oracle’s revenue miss. It reported total sales in the quarter of just $12.45 billion, below the $12.47 billion consensus estimate.

Oracle’s second quarter is unlikely to get any better either, as the company called for earnings of between $1.30 and $1.34 per share on revenue growth of just 5% to 7%. Analysts are looking for second-quarter earnings of $1.33 per share on sales of $13.28 billion, implying revenue growth of 8%.

Investors recoiled at the numbers, and Oracle’s stock fell more than 8% in extended trading, erasing a slight gain made during the regular trading session.

One possible reason for the revenue miss was Oracle’s ongoing integration of the electronic healthcare records firm Cerner Corp. The company had previously closed on its $28.2 billion acquisition of Cerner in June 2022, and it said that business is now being integrated within its cloud infrastructure.

On a conference call, Oracle Chief Executive Safra Catz (pictured) said the accelerated transition of Cerner to Oracle’s cloud has had the effect of slowing its revenue growth. “This transition is resulting in some near-term headwinds to the Cerner growth rate as customers move from licensed purchases, which are recognized upfront, to cloud subscriptions which are recognized ratably,” she explained.

The cloud is, however, Oracle’s biggest bright spot. The company reported cloud infrastructure revenue of $1.5 billion for the quarter, up 66% from a year earlier. According to Catz, this was much faster growth than its competitors in the hyperscale cloud infrastructure business.

What she didn’t say, though, is that this was slower than the 76% growth it reported in the prior quarter. For now, Oracle’s cloud infrastructure business remains much smaller than its rivals, Amazon Web Services Inc., Microsoft Corp. and Google LLC.

“Total cloud services revenue, infrastructure plus applications, grew 30% to $4.6 billion in the quarter,” Catz said in prepared remarks. “Oracle Cloud Services plus license support revenue now accounts for 77% of Oracle’s total revenue. This highly predictable, highly profitable recurring revenue stream drove 16% growth in non-GAAP earnings per share, 21% growth in free cash flow, and $7 billion in operating cash flow in the Q1.”

The company reported total cloud services and license support revenue of $9.55 billion, up 13% from a year earlier and above Wall Street’s consensus estimate of $9.44 billion. But within that segment, cloud license and on-premises license revenue fell 10% to just $809 million, some way below the Street’s forecast of $892.7 million.

Hardware revenue was another disappointment, falling 6% from a year earlier, to $714 million. Analysts were looking for $739.6 million there.

“Oracle did not deliver to expectations and that is never a good thing,” said Holger Mueller of Constellation Research Inc.

On the other hand, the analyst noted that Oracle’s fiscal first quarter has traditionally always been weaker, and said there were still good reasons for optimism. “Oracle entire cloud portfolio is growing and the company became more profitable with higher cash flow,” Mueller said.

Oracle’s founder, Chairman and Chief Technology Officer Larry Ellison did his best to stir up excitement over Oracle’s prospects in the booming artificial intelligence industry. During the quarter, Oracle announced a strategic partnership with Cohere Inc., a generative AI startup whose chatbots rival OpenAI LP and ChatGPT.

As part of that initiative, Cohere will train, build and deploy its generative AI models on Oracle’s cloud infrastructure. Customers will be able to customize and train Cohere’s models on their own data to automate business processes, improve decision-making and enhance customer experiences, Oracle said at the time.

According to Ellison, Oracle is forging additional partnerships in the AI industry. “As of today, AI development companies have signed contracts to purchase more than $4 billion of capacity in Oracle’s Gen2 cloud,” the tech industry veteran said. “That’s twice as much as we had booked at the end of Q4.”

On the call, Ellison also revealed that Elon Musk’s recently announced AI startup xAI Corp. will be using Oracle’s cloud services. That move is not so surprising, as Ellison owns shares of Tesla Corp. and was also a board member until August 2022.

“Clearly, Larry Ellison and Saffra Catz see a massive opportunity in AI and are walking the talk on the CAPEX side,” Mueller added. “It is good to see all regions growing too, as that has not always the case for Oracle in its first quarters.”

Charles King of Pund-IT Inc. said the after-hours fall in Oracle’s share price was not surprising given the revenue miss and soft outlook. He said investors likely saw that the time was ripe to take profits, with Oracle’s stock up more than 50% this year. Investors may also be uncertain over the true size of Oracle’s AI opportunity, he added.

“Although I expect Oracle is likely to benefit from enthusiasm around generative AI, it’s hard to measure how much this will buoy the company in real terms,” King said. “Larry Ellison’s announcement that Elon Musk’s startup xAI has signed a contract to train AI models on its Gen2 Cloud could be good news, but that group is very much in its early days and its timing, plans and need for cloud are unclear, at best.”

Prior to today’s slide, Oracle’s stock was up 55% in the year to date, well ahead of the S&P 500 Index, which has gained just 17% over the same time frame.

Photo: Oracle PR/Flickr