UPDATED 16:58 EDT / JUNE 21 2017

CLOUD

With another earnings upside, Oracle’s journey to the cloud speeds ahead

Oracle Corp.’s move to embrace cloud computing gained more ground today as it closed out its fiscal year with another better-than-expected earnings report driven by cloud revenues.

The database and business software giant reported a profit of 89 cents a share before certain costs such as stock compensation, up from 81 cents a share ago, on revenue of $10.9 billion, up 3 percent. Analysts had been looking for an adjusted profit of only 78 cents a share on revenue of $10.45 billion.

As a result, investors cheered, sending shares up more than 10 percent in after-hours trading, topping $50 a share, after about a 1 percent uptick in regular trading. If the confidence holds in trading Thursday, that would set a new record for Oracle’s stock. Its shares already had done well so far in 2017, rising 20 percent up to today compared with the S&P 500’s 7 percent rise.

Oracle has made a big bet on the cloud, while also trying to position itself as the one company that, like the big tech companies of yore, can supply everything from server hardware to software to cloud services as a package for big enterprises. It has lagged leaders such as Amazon Web Services Inc. and Microsoft Corp.’s Azure in the base-level infrastructure-as-a-service market, though. Gartner Inc. recently called Oracle’s second-generation IaaS offering a “minimum viable product,” with only a basic selection of cloud IaaS compute, storage and networking capabilities.

But the latest quarter shows that its software-as-a-service and platform-as-a-service businesses continue to rocket. SaaS revenue rose 67 percent, to $964 million, and while it doesn’t break out the other two categories individually, IaaS and PaaS revenue combined rose 40 percent.

Total cloud revenue in the quarter was up 58 percent, to $1.4 billion. The rapid growth was likely at least partly driven by some big deals such as a recent one with AT&T Inc., as well as revenues from its NetSuite acquisition that closed earlier this year.

“We had a tremendous quarter in just about every way,” co-Chief Executive Safra Catz said on the earnings conference call. “The cloud has become our predominant growth vehicle.” That should result in an acceleration in earnings per share in fiscal 2018, she added.

Oracle’s other CEO, Mark Hurd (pictured), also pointed out that Oracle’s cloud subscription revenue totaled $855 million in the quarter, for more than $2 billion for the fiscal year. Oracle Chairman and Chief Technology Officer Larry Ellison said he expects more deals in the coming year like the AT&T one, in which the telecom giant moved its databases to the Oracle cloud. “These large-scale migrations will dramatically increase the size of both our PaaS and IaaS cloud businesses,” he said.

Analysts are beginning to warm to Oracle’s efforts, even if in the short term cloud subscription revenues won’t make up for the software license decline. “We think this can help ORCL capture net new wallet share and thus elevate its overall growth profile as such efforts mature,” Cowen & Co. analyst J. Derrick Wood wrote in a recent note to clients. “The recent announcement of a major win with AT&T for migrating thousands of databases to ORCL’s IaaS + PaaS platform implies that this new value proposition is starting to resonate in the market.”

All that said, sales of licenses for business software such as databases still account for most of Oracle’s revenues. In fact, the business did substantially better than expected. New software licenses came in $313 million higher than Oracle’s guidance, and software updates and support were $50 million higher than forecast, said Ralph Finos, an analyst with SiliconANGLE’s sister company Wikibon.

But software licenses are on a long-term decline, and so are servers. Hardware alone was down 12 percent in the fourth quarter.

It’s clear Oracle’s betting on a future in which the cloud will lead the way. Indeed, rumors swirled last month that a major reorganization of the sales force, including layoffs, was coming as a result of the increased cloud focus. Hurd today denied that, saying the sales force is not being reduced despite “realigning specializations” in the team.

Looking ahead, Catz said Oracle expects overall revenue growth to rise 4 percent to 6 percent in fiscal 2018, but cloud revenues will be up 48 percent to 52 percent. Adjusted earnings per share, she said, is forecast at 59 to 61 cents, up from 51 cents in the first quarter of fiscal 2017, and she promised earnings per share growth would be in double digits this coming year as cloud revenues “materially” pass new software revenues for the year.

Ellison reiterated his promise that Oracle would pass Salesforce.com Inc., its key rival in cloud applications. In addition, he said, “we expect our IaaS and PaaS businesses accelerate into hypergrowth” and together exceed the SaaS business.

Hurd cited a litany of new customer wins such as General Electric, Kraft Heinz, MetLife, Motorola, Netflix, Rubbermaid and Orange. “Our pipeline is very large,” he said. “We’re clearly the fastest-growing cloud company at scale.” In particular, he said Oracle got 868 new customers for enterprise resource planning cloud software, the basic applications nearly every business uses.

Besides its overall cloud push, Oracle has pitched its ability to provide hybrid setups that involve cloud services not just on its own servers but also in Oracle servers in customers’ data centers. Hurd said the company sold more than 100 such Cloud Machines in the quarter.

Photo: Robert Hof

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