Oracle Beats Street On Profits, But Revenue Still Slipping

Often, when a company’s earnings report doesn’t live up to investors’ expectations, one can find in the explanation the line “due to strengthening of the U.S. dollar compared to foreign currencies.” Most of the time, it’s found deep in the text; for Oracle on Dec. 16, it comprised the second sentence of the press report.

Undoubtedly, the strengthening of the U.S. dollar versus foreign currencies is a factor in all quarterly reports of all U.S. companies that do business internationally, but when it’s played up very high on an earnings report, it can be a bandage of sorts trying to cover up something else in the report.

It wasn’t the whole story for this quarterly report, but it was a factor. In its fiscal Q2 report, Oracle exceeded profit expectations, delivering earnings per share of 63 cents compared to Wall Street consensus of 60 cents. Net income was $2.2 billion (£1.47bn)

‘Stronger-than-expected Currency Headwind’

On the other hand, it missed by a small margin on its revenue, reporting $9.0 billion (£6bn), down 6 percent from a year ago; analysts had expected $9.06 billion.

“We’re very pleased with our non-GAAP EPS of $0.63, beating the mid-point of guidance by 4 cents despite a stronger-than-expected currency headwind,” said co-CEO Safra Catz.

The bigger issue Oracle, along with many other old-line IT companies, has to solve isn’t the often-adverse relationship of the U.S. currency to foreign ones. It is the switchover in emphasis from legacy on-premises installations of its databases and middleware to selling those same customers into cloud services. It is not an easy assignment to propose such a change to admins of long-entrenched on-premises IT systems.

The facts are that Oracle’s older businesses have been shrinking for several years and that its cloud businesses are now growing. The question is: Will the cloud businesses grow fast enough to cover for the decline of the on-premises businesses? So far, they haven’t, but they are picking up steam.

On Dec. 16, Oracle reported that its cloud revenue overall was up 31 percent for the quarter at $649 million (£434m). Cloud software as a service (SaaS) and platform as a service (PaaS) revenues were $484 million (£323m), up 39 percent in constant currency. These are excellent numbers, but the income derived only represents about 30 percent of the company’s total.

Still, Some Worrisome Numbers

On the other side of the company, the following numbers continue to be worrisome, although not unexpected: Total on-premises software revenues ($6.4 billion, down 7 percent year over year), total hardware revenues ($1.1 billion (£740m), down 16 percent in U.S. dollars and 10 percent in constant currency), and total services revenues ($861 million (£575m), down 8 percent in U.S. dollars and in constant currency).

Nonetheless, in relative market terms, Oracle is the leader in making the change from hardware to cloud, said Chairman and co-founder Larry Ellison.

“We are still on-target to sell and book more than $1.5 billion (£1bn) of new SaaS and PaaS business this fiscal year,” Ellison said on a conference call to analysts and journalists. “That is considerably more SaaS and PaaS new business than any other cloud services provider, including Salesforce.com.”

At $484 million (£324m), Oracle is now selling SaaS and PaaS subscriptions at about one-third the total of Salesforce’s quarterly numbers. That may not give rise to much concern in the Marc Benioff suite and boardroom at this time, but if the Oracle numbers keep growing, it could become a problem for Salesforce.

Originally published on eWeek.