Bits Blog: Oracle’s Next Cloud Moves

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Oracle’s Revenue Disappoints Wall Street Again

The quarterly results announced Thursday could escalate investors' fears about Oracle's ability to adapt to the changing demands of its customers. Businesses and government agencies are increasingly buying software through monthly or annual subscriptions that enable employees to access applications on any machine with an Internet connection. This "cloud computing" approach is a shift from Oracle's traditional approach of licensing software that is installed on individual computers kept on the premises of its customers.

Oracle has been rolling out more cloud computing options through acquisitions and in-house development, but its recent performance is raising questions about its ability to compete in this growing market. The cloud computing shift is being led by smaller companies that were set up to focus on leasing software over the Internet. This group includes Salesforce.com Inc., Workday Inc. and NetSuite Inc., a company backed by Oracle CEO Larry Ellison.

Like other software makers born decades ago, Oracle and longtime rival SAP are trying to mine new markets while still clinging to the old way of doing things because the familiar sales methods still bring in most of the company's revenue.

"It's a very difficult transition," Forrester Research analyst Andrew Bartels said. "It's something they are clearly nervous about."

Investors are jittery, too. Oracle's stock plunged $2.99, or 9 percent, to $30.22 after the numbers came out.

A similar sell-off occurred three months ago when Oracle's previous quarterly report proved to be a letdown.

The latest report covering Oracle's fiscal fourth quarter also contained troubling signs as several key gauges fell below the analyst projections that steer Wall Street's expectations.

Nonetheless, Oracle insists it remains healthy. It boasted that it added more than 500 cloud computing customers in the past quarter, putting the company on a pace to generate more than $1 billion annually in cloud computing.

Ellison, an executive known for brash statements, promised analysts during a Thursday conference call that Oracle is poised to unveil a series of "startling" partnerships with Salesforce, NetSuite and other cloud computing services that will rely on Oracle's latest database software. "These partnerships in the cloud I think will reshape the cloud and reshape the perception of Oracle technology in the cloud," Ellison said. He added that more details will be provided next week.

In an apparent attempt to win over skeptical investors, Oracle is doubling its quarterly dividend. A payment of 12 cents per share will be made on Aug. 2 to shareholders of record as of July 12. Oracle will also try to boost its stock by spending an additional $12 billion buying back its own shares. The stock will move from the Nasdaq exchange to the New York Stock Exchange next month if Oracle wins approval of an application announced Thursday.

The Redwood Shores, Calif., company earned $3.8 billion, or 80 cents per share, in the three months ending in May. That represents a 10 percent increase from income of $3.5 billion, or 69 cents per share, at the same time last year.

If not for certain expenses unrelated to its ongoing business, Oracle said it would have earned 87 cents per share. That matched the average estimate among analysts surveyed by FactSet.

But revenue remained unchanged at $10.9 billion — about $170 million below analyst forecasts.

In a particularly telling sign, Oracle's sales of new software licenses and cloud computing subscriptions increased just 1 percent from last year. If not for currency fluctuations that undercut Oracle, the company said the increase would have been 2 percent. A relatively strong U.S. dollar means sales made in other currencies get converted into fewer dollars.

The mid-range of an estimate provided by Oracle's management in March called for a 6 percent increase, excluding differences in currency rates. New software licenses and subscriptions are considered to be a key measure of a software maker's health because they set up a steady flow of future revenue.

Oracle Chief Financial Officer Safra Catz blamed weak markets in Australia, Asia and Brazil for dragging down sales in the past quarter.

In the current quarter ending in August, Oracle predicted new licenses and cloud computing subscriptions will rise by 1 percent to 9 percent from the same time last year.

Excluding certain expenses, Oracle anticipates its earnings will range from 56 cents to 59 cents per share in the current quarter. Analysts polled by FactSet had forecast earnings of 58 cents per share.

Oracle’s New Software Sales Fall and Stock Slumps

The world's No. 3 software maker projected a 1 to 11 percent rise in new software licenses and Internet-based subscriptions in the May quarter - an indicator of future performance. But investors focused on a 2 percent slip in the February quarter that badly missed Wall Street's targets.

Oracle's February quarter revenue miss was its worst since the November quarter of 2011.

"What we really saw was the lack of urgency we sometimes see in the sales force, as Q3 deals fall into Q4," Chief Financial Officer Safra Catz told analysts on a conference call.

"Since we've been adding literally thousands of new sales reps around the world, the problem was largely sales execution, especially with the new reps as they ran out of runway in Q3."

Wall Street remains concerned about tepid spending by governments and corporations in an uncertain global environment, but Catz dismissed those fears.

Oracle is also struggling with its hardware division and facing greater competition in cloud or Internet-based software from the likes of International Business Machines Corp and SAP AG and nimbler rivals like Salesforce Inc and Workday Inc.

Oppenheimer analyst Brian Schwartz said Oracle's May-quarter software sales projection was in line with expectations.

"That's probably a little hint that they've gotten off to a good start in Q4, that some of those deals that slipped in Q3 likely closed in Q4," Schwartz said.

WHITHER HARDWARE

Some investors still worry that governments and corporations around the globe may postpone spending on technology projects because of uncertainty over the economy, particularly in Europe.

"Business sentiment and confidence is way down. People are more cautious right now in business than they are in the stock market. That's how we get very high valuation multiples on stocks, but businesses are pulling back," said Richard Williams, an analyst at Cross Research.

Revenue from Oracle's hardware division, which it acquired through the $5.6 billion purchase of Sun Microsystems in 2010, fell to $671 million from $869 million in the year-ago quarter.

The division's revenue has fallen every quarter since it closed the Sun deal and Chief Executive Larry Ellison had said in December he expected hardware systems revenue to start growing in the fiscal fourth quarter.

Oracle projected its hardware product revenue for the current quarter would fall between 12 and 22 percent.

"There are areas that continue to be in transition, like the hardware business and the overall move to the cloud," said FBR Capital Markets analyst Daniel Ives. "They obviously hit a speed bump but the company is cautiously optimistic."

Oracle posted a 2 percent drop in new software sales and Internet-based software subscriptions to $2.3 billion in its fiscal third quarter. Investors scrutinize new software sales because they generate high-margin, long-term maintenance contracts and are an important barometer of future profit.

"It doesn't help that the sequester deadline is on the last day of our quarter, and so that has a little bit of an impact here in North America, but not necessarily anywhere else," Catz said. "The economy has been as it is in Europe for a while."

Oracle's revenue miss - about 4.4 percent below the average forecast - was its worst since the November quarter of 2011, when it fell short of target by 4.5 percent, according to Thomson Reuters data.

Next week, Oracle will start deliveries of its latest generation of servers, built with a record-breaking microprocessor, Ellison said.

Overall, Oracle's revenue dipped 1 percent to $9 billion, missing the $9.382 billion analysts had expected on average according to Thomson Reuters I/B/E/S.

GAAP net profit was unchanged at $2.5 billion. GAAP earnings per share were 52 cents, up 6 percent from the year-ago period. Its adjusted earnings per share were 65 cents, shy of 66 cents expected by analysts.

Shares in the software company fell 8 percent to $32.95 after hours, from a close of $35.765 on Nasdaq.

(Reporting by Noel Randewich; Editing by Richard Chang)