UPDATED 19:23 EDT / JUNE 19 2018

CLOUD

Oracle’s cloud transition still isn’t lifting financial results, and its stock drops

Updated:

Having once talked about being a cloud computing leader, Oracle Corp. now increasingly looks like a company that appears to be resigned to a slow-growth strategy focused mainly on its installed base.

In its fiscal fourth quarter announced today, Oracle’s closely watched cloud services and license support revenues climbed a modest 8 percent from a year ago. And overall license revenue declined 5 percent, resulting in an overall revenue growth rate of 3 percent.

Moreover, cloud services operating expenses grow 20 percent, well ahead of revenue growth. While revenue was ahead of analysts’ estimates, the company’s cloud growth rate remains far behind the 40 percent-plus growth rates of competitors such as Amazon Web Services Inc. and Microsoft Corp., which are also building off a much larger base.

Perhaps in response, Oracle is revising the way it reports cloud-related revenues to reflect more accurately the split between customers’ on-premises and cloud deployments. The result was more than a quadrupling of reported cloud revenues, from $1.57 billion in its third fiscal quarter to $6.8 billion in the quarter just concluded.

That prompted one analyst on the company’s somewhat testy conference call to question whether the company was “obfuscating” its real cloud numbers, a suggestion that drew a strong response from Co-Chief Executive Safra Catz (pictured).

“There is no hiding,” she said. “Our cloud number was right where we said we should be. Margins are up. Cloud billings are strong. We don’t have any bad news here.”

Investors didn’t agree. Although the company’s shares initially ticked up about 1 percent in after-hours trading, they slipped more than 4 percent after management’s call with analysts began and later recovered only slightly, still down more than 3 percent. Shareholder had perhaps been hoping for more positive forward-looking guidance, which was addressed only obliquely in the earnings press release. Update: Shares fell more than 7 percent Wednesday.

Catz said total revenues in the first fiscal quarter of 2019 should grow between 1 and 3 percent in constant currency with earnings per share expected to grow between 11 and 15 percent. “It’s quite clear that we had a superb quarter and we’re expecting the same next quarter.”

Is Oracle moving fast enough to shift its applications and big data business to the cloud? “I’d say no,” said Ralph Finos, an analyst at the research firm Wikibon, which is owned by the same company as SiliconANGLE. “Robust new software and relatively mediocre cloud growth points to that conclusion. It will be a long haul.”

Catz said the revised approach to reporting cloud revenue is intended to reflect more accurately the results of the “bring-your-own-license” option Oracle introduced last year. It gives customers the option of moving software licenses between on-premises and cloud platforms while paying only for the cost of incremental infrastructure.

“Customers are now entering into licenses where some deployment is on-prem and some is in the cloud. Previously these would have been reported solely as on-prem licenses,” she said. “Now that we’ve built a rapidly growing cloud business, we expect our overall revenue growth to accelerate.”

Oracle’s cloud momentum “appears to be sustainable,” but the overall business “continues to be far smaller than those of other business-centric vendors,” said Charles King, president and principal analyst at Pund-IT Inc. “Catching up with any of those competitors seems unlikely anytime soon.”

Adjusted earnings per share of 99 cents before costs such as stock compensation beat analyst expectations of 94 cents on total sales of $11.2 billion. Full-year sales rose 10 percent, to $26.2 billion.

Executives said Oracle’s new applications are showing strong growth, citing a 45 percent growth rate in its platform-as-a-service business and 62 percent growth in bookings for its NetSuite business management software suite, which it bought for $9.3 billion nearly two years ago. They also ticked off a long list of blue-chip customers that have adopted the company’s enterprise resource offerings, without providing specific numbers. “This was a fantastic ERP quarter,” said co-CEO Mark Hurd.

Rather than trash-talking about its cloud infrastructure plans, however, Oracle is now stressing its ability to combine software as a service, infrastructure as a service and platform as a service as a major distinction between it and competitors, “who are mostly focused on SaaS-only or IaaS-only,” said Chairman and Chief Technology Officer Larry Ellison.

That strategy probably plays better to the company’s strength, Finos said. Despite growing competition from open-source and low-cost competitors, “it will be hard to replace them,” he said. “They have a lot of incumbent power, especially if they can execute on [bring-your-own-license].”

Pund-IT’s King agreed. “The enterprise-class characteristics of Oracle database solutions make it difficult for customers to simply walk away,” he said. “Until open-source transactions and analytics solutions become more mature and deeper-featured, Oracle’s position seems relatively secure.”

Image: Robert Hof/SiliconANGLE

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