UPDATED 18:40 EDT / SEPTEMBER 14 2017

CLOUD

Cloud surge drives strong Oracle earnings but outlook puts the brakes on shares

Updated Friday

Cloud revenue growth drove strong first-quarter earnings at Oracle Corp. with revenue of $9.2 billion and earnings per share of 62 cents both surpassing analyst expectations.

But the database and business software giant’s guidance for the second quarter of its fiscal 2018 appeared to disappoint investors. After initially rising slightly, the stock dropped more than 5 percent in after-hours trading moments after co-Chief Executive Safra Catz said total second-quarter revenue is expected to grow between 4 and 6 percent on slower growth in overall cloud revenue. Update: Investors turned even more bearish in Friday morning trading, as shares were down more than 6 percent.

Total cloud revenue grew 51 percent to $1.5 billion, fueled by sales of software as a service applications, which grew 62 percent, to $1.07 billion. Platform as a service and infrastructure as a service revenue rose 28 percent, to $400 million. “We are the fastest-growing cloud company at scale,” said co-CEO Mark Hurd.

After getting a late start in cloud, Oracle appears to have found its footing, though it still trails far behind leaders such as Amazon Web Services Inc. and Microsoft Corp.’s Azure. It has beaten consensus revenue expectations for the last two quarters after having missed in 13 of the previous 16 quarters.

Investors have turned bullish on Oracle recently, driving its shares to a record high of $52.80 on Wednesday, the third straight day of record highs. Shares are up more than 37 percent this year, nearly doubling the growth in the NASDAQ composite index.

Oracle’s embrace of the cloud is often pegged to its $9.3 billion acquisition of NetSuite Inc. last November. NetSuite was expected to anchor Oracle’s cloud-based suite of business applications, and it appears to be performing as expected. Oracle said it now has 5,000 customers of its cloud-based Fusion enterprise resource planning suite and 12,000 NetSuite customers. Overall cloud enterprise resource planning revenues jumped 93 percent, Hurd said. Oracle expects double-digit percentage growth in its overall applications business for the year.

Unlike SaaS competitors like Salesforce.com Inc. and Workday Inc., Oracle brings a full range of applications to the table that include customer relationship management, human capital management and ERP. “We’re the only suite provider,” Hurd said. “That gives us an incredible advantage.”

The strong growth in the SaaS business indicates that Oracle is stealing market share from competitors in core financial and CRM applications. “If you compare our growth of apps in the cloud to Salesforce and Workday, it isn’t even close,” said Chief Technology Officer Larry Ellison (pictured). “We sell more new applications customers than Salesforce.com does every year.”

Organic growth

While the NetSuite acquisition was a big but expensive boost for the cloud business, Oracle expects most of its growth for the foreseeable future to come from internally developed technology, such as Fusion. “There’s no one left to buy,” Ellison said. “As we focus on the cloud, there aren’t a lot of obvious targets.”

The company is also doubling down on its core database business as a way of distinguishing itself from AWS in the cloud. Oracle said it will announce “the world’s first fully autonomous database cloud service” in a few weeks at its Open World conference in San Francisco.

Built on a machine learning foundation, the service is said to do away with the need for human intervention for database management tooling. Ellison said this will enable Oracle to offer service-level agreements of 99.995 percent at a lower cost than Amazon. That translates to less than 30 minutes of downtime per year, he said.

The autonomous database will reportedly be capable of tuning, patching and upgrading itself while still running. “AWS can’t do any of this stuff,” Ellison said.

Gross margin for SaaS applications was 67 percent, up strongly from 59 percent the previous quarter. “We remain committed to our goal of 80 percent SaaS margins, possibly as soon as sometime in FY 19,” Catz said. Deferred revenue, an important indicator of financial stability, was $10.3 billion, up 9 percent. Cloud deferred revenues leaped 57 percent.

There’s no question that Oracle has shed its early reservations about the promise of cloud computing, but some analysts still doubt that the company has adopted the right mindset to lead the market.

“A larger issue to consider is why a vendor feels the need to trumpet success in areas like cloud and open source,” said Charles King, president and principal analyst at Pund-IT Inc. “That’s doubly the case for Oracle since its founder and some other executives were notably dubious about the value of both technologies. Oracle appears to be doing pretty well, but I expect it was inspired more by customer demand than strategic vision.”

Still, Oracle has embraced the current reality that although plenty of workloads are moving to the public cloud, many will remain in corporate data centers for years to come, and Oracle can stake a claim to an ability to serve them better than public clouds.

“This is not as jazzy as public cloud SaaS, perhaps, but is a strong, long-term pathway for Oracle customers to benefit from the total Oracle offering — hardware, middleware, DB, and App software, service and cloud,” said Ralph Finos, an analyst at SiliconANGLE sister company Wikibon. “In the longer term, it’s a more profitable strategy that is compatible with who they and their customers are.”

Image: Oracle

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