Cloud services are a good business but takes time to get the payoff

Taken from www.itnews.com

Oracle profit slides 24 percent as customers move to the cloud

Jun 17, 2015 | IDG News Service

The company reported its first overall sales decline in more than two years

by James Niccolai

Oracle has reported a sharp drop in profit for the quarter just ended, with customers spending more on its cloud services but less on software that runs in their own data centers.

Chairman Larry Ellison portrayed the shift as a positive one and said Oracle can make more money selling cloud services over the long term. But the change didn't seem to help it much last quarter, when its results were also battered by the strong U.S. dollar.

Oracle's cloud business seems to be growing strongly. Revenue from software sold as a service climbed 29 percent from this time last year, to $416 million, the company said. But that's a relatively small part of Oracle's business, and it wasn't enough to offset mediocre performance elsewhere.

Sales of new software licenses, which account for roughly a third of Oracle's overall revenue, declined 17 percent from this time last year, and the fourth quarter is usually the strongest of its fiscal year, because sales teams are pushing hard to meet their quotas.

Revenue from license updates and support fared better but was still flat from last year because of the currency effects.

On a call to discuss the results, Ellison said cloud services are a good business for Oracle to be in, but that it takes time to get the payoff.

For example, he said, if a customer buys $1 million in new software licenses, Oracle gets $1 million from the sale immediately, then collects $3 million in maintenance and support fees over the next 10 years.

With cloud services, if a customer signs up for a $1 million subscription, Oracle gets no money up front, but it collects $1 million a year for the next 10 years. "It's a much better business for us," Ellison said.

That's the theory, at least, though it depends on the customer continuing their contract for the full 10 years.

And the cloud sale has a short-term hit on profitability. That's because, although Oracle doesn't book the revenue immediately, it does still have to pay commission fees and other costs.

"This shift [to cloud] has the effect of lowering near-term [earnings per share], but over time will increase it significantly," said CEO Safra Catz.

Cloud services are a highly profitable business, according to Ellison. "This is gonna shock you," he said, but the profit margins on cloud software sales are about the same as those for selling software licenses and support. "It's stunningly profitable," he said.

He also went to great pains to explain that Oracle is growing faster in cloud applications than rivals Salesforce.com and Workday -- although that might not be surprising, since for Oracle it's a newer business. "Clearly, our cloud business has entered hyper-growth," Ellison said.

Oracle's total revenue for the quarter, which ended May 31, was $10.7 billion, the company said. That was down 5 percent from a year earlier and below the $10.9 billion that financial analysts had expected, according to Thomson Reuters.

Net income was $2.8 billion, down 24 percent from a year earlier. Excluding certain one-time items, earnings per share was $0.78, well short of the analyst forecast of $0.86.

Oracle's business has shown signs of slowing -- its sales last quarter were flat from the year before -- but this is the first quarter in more than two years that its overall sales have dropped.

That was largely due to the strengthening dollar, which can make products from U.S. companies more expensive to buy overseas. Oracle said its total revenue would have increased 3 percent without the currency impact.

But even allowing for the currency effect, sales of new software licenses were down 10 percent. Revenue from license updates and support fees climbed 8 percent on that basis, and total hardware revenue climbed 5 percent.