Oracle underwhelms investors with cloud revenue, forecast

[NEW YORK] Oracle Corp.'s investors have grown impatient with the world's second-largest software company's slow transition to cloud computing.

The Redwood City, California-based company said sales of cloud products gained 32 per cent to US$1.57 billion in the quarter ended Feb. 28. But the report, and a forecast of 19 per cent to 23 per cent growth in the current quarter, underwhelmed investors and sent shares down as much as 7.3 per cent in extended trading.

Oracle has struggled to transform itself from a traditional information-technology vendor into a cloud contender. The company has bet its future on a new version of its database software that automates more functions and a growing suite of cloud-based applications, but has faced stiff competition from cloud vendors including Amazon.com Inc., Microsoft Corp. and Salesforce.com Inc.

"They missed the cloud number, which is the key to this transition story," said Pat Walravens, an analyst at JMP Securities LLC. "Investors were expecting strength in new licenses, and that decreased. This is a quarter when Salesforce and Adobe told you that IT spending was strong, but Oracle hasn't benefited from that." The company's strategy that lets customers choose to house software on their own servers or with Oracle, as a bridge to the cloud, also lost traction in the quarter, exacerbating worries about the company's pivot to internet-based products. Still, Oracle has invested in new data centers to support existing client workloads and made acquisitions, such as last month's purchase of security startup Zenedge LLC, to support its cloud offerings.

Total revenue rose 6.1 per cent to US$9.77 billion in the fiscal third quarter, in-line with what investors had estimated. Profit, excluding some items, was US 83 cents a share, 11 cents higher than analysts had projected.

Oracle projected profit, excluding some costs, of US92 cents to US95 cents a share in the current quarter, compared with analysts' estimates of 90 cents. Revenue should grow 1 to 3 per cent, the company said.

Oracle's shares fell to a low of S$48.15 in extended trading after closing at S$51.95 in New York. The stock has gained 14 per cent in the past 12 months.

While Oracle's cloud unit has grown in recent quarters, its sales made up just 16 percent of the company's total quarterly revenue. The older software-license business still dominates with US$6.42 billion in sales, or two-thirds of revenue. Demand for new software licenses, which can be used on customers' own hardware or on Oracle's servers, declined 1.8 per cent to US$1.39 billion from a year earlier. Revenue from software updates and product support to existing customers grew 5.6 per cent to US$5.03 billion.

Oracle maintained its shareholder dividend of US19 cents a share. The Bloomberg dividend forecast was US22 cents. The company took a one-time charge of US$6.9 billion because of changes to the U.S. tax code approved in December. Excluding some items, Oracle said its effective tax rate was 16.1 per cent in the quarter, compared with 21.6 per cent a year earlier. The company projected it would pay 19.5 per cent in taxes in the 2019 fiscal year.

In its shift to the cloud, Oracle has tried to leverage its longstanding ties to large enterprises, buying and cultivating products for specific industries. Investors have been bullish on the company's success in targeting financial services firms. Its broader strategy for applications has focused on covering as much ground as possible - offering products to manage relationships with clients, handle human-resources tasks and organize corporate spending, which has sparked competition with newer software companies Salesforce and Workday Inc.

'Not a Legacy Business' Oracle's database software has long been a bedrock part of its business. Co-founder and Chairman Larry Ellison beat back the notion that the product is an old offering.

"Our license technology business is not a legacy business," Mr Ellison said on a call with analysts. "These licenses are going to be used and are being used more and more in modern clouds, not just the Oracle Cloud, but our competitors' clouds as well." He cited Salesforce, SAP SE, Microsoft and Amazon as major clients.

Oracle has sought growth from its new "Autonomous Database," which can patch its own technical issues and run without a human staff. Mr Ellison called it "the most important thing Oracle's ever done in terms of data management" and said it was faster than Amazon's competing product.

Mr Oracle announced plans to open a dozen new data-center "regions" around the world last month, mostly to support its existing database business. The regions would feature two or three facilities apiece in locations including the U.S., China and Saudi Arabia - quadrupling the current facilities of this type, according to the company's website.

"A lot of this is about extending our global reach, getting into more locations, particularly where we have huge database infrastructure," co-Chief Executive Officer Mark Hurd said at a Goldman Sachs-hosted conference last month.

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