Jun 22, 2017
Oracle leaps to record as cloud transition hits turning point
Oracle Corp. was late to the cloud revolution, allowing upstarts like Salesforce.com Inc. to find significant market share with software delivered over the internet, and has suffered while making an acquisition-fueled push into the space.
The Band-Aid appears to have come off Oracle's wound, however, and the company seems assured that its healed finances will be better than ever. Investors showed belief after Oracle's fiscal fourth-quarter earnings report Wednesday evening, sending shares that had never cracked $47 in regular trading, adjusted for splits, to more than $51 in after-hours action. If that move holds, Oracle would be worth more than $200 billion.
Oracle ORCL, +9.86% profit and revenue had declined in each of its previous two fiscal years, after a steady yearslong climb. That is not surprising in a transition to cloud, as software companies trade large one-time payments for boxed software for long-term contracts paying out monthly fees spread out over the term.
This is especially true in Oracle's case, as naysayers believe the company was mostly converting its large customer base into cloud buyers, effectively trading one form of payment for another. Executives on Wednesday, though, crowed about new customer wins, as well as convincing companies to sign on to more than just software-as-a-service but also its cloud computing and full platform offerings as well.
Co-Chief Executive Mark Hurd noted that about two-thirds of customers buying Oracle's cloud Enterprise Resource Planning Software in the quarter were new customers, and ticked off a long list of companies Oracle has signed up. Founder and Chairman Larry Ellison noted that new customers are easier to convince on the cloud, leaving a lot of potential wins among its existing, on-premises customer base.
"We have seen our existing base move, they just…move slower than what the new logos have," Ellison said in Wednesday's conference call. "I actually think this is a good thing because I believe that we will get all of our existing customers on-prem, roughly speaking, moving to our cloud infrastructure over time."
By handily beating expectations in the fourth quarter of its fiscal year, Oracle posted full-year revenue growth of 1.8% and profit growth of 4.9%, on a GAAP basis. Co-CEO Safra Catz projected growth would jump even more in the current fiscal year, which began June 1, calling for full-year sales growth of 4% to 6% and sticking with her prediction that earnings per share would grow by a double-digit percentage, on an adjusted and constant-currency basis.
"We will have less drag from the transition and the base will continue to grow, so this should really accelerate," Catz said in Wednesday's call.
Even with annual gains and promises for more, Oracle's cloud transition is a work in progress. Total cloud revenue in the fourth quarter was $1.36 billion, while on-premises software accounted for $7.5 billion, and Oracle just instituted new reporting segments Wednesday that better reflect its changed business.
Oracle's cloud-computing business is still young and small, with plenty of competition from entrenched players like Amazon.com Inc.'s AMZN, -0.07% Amazon Web Services and Microsoft Corp.'s MSFT, +0.75% Azure. Software upstarts that flourished as Oracle refused to believe in cloud delivery, like former Oracle exec Marc Benioff's Salesforce.com Inc. CRM, +0.74% , have developed strong customer bases and ecosystems.
Oracle's transformation is far from over, but the company has now proven that it can boost revenue and profit while focusing on cloud. The forecast for the 2018 fiscal year suggests it will top, or at least rival, the record revenue and profit it found in 2014, before growth stalled. That should be enough to pacify Oracle investors who have been waiting for growth to return, and possibly entice others who see a much lower price-to-earnings ratio than cloud natives like Salesforce.