Oracle Cloud Growth Shows Promise as Company Tops Estimates

  • Provider also unveils customer-purchasing service, memo shows
  • Company reports key products expanded sales by 57 percent

Oracle Reaps Rewards of Long-Term Cloud Investments

Oracle Corp. reported profit that topped estimates and posted strong gains in revenue from cloud-based businesses, signaling that it’s making progress in the transition away from traditional software. The shares rose the most in more than a year.

Profit, excluding some items, was 64 cents a share in the period that ended Feb. 29, surpassing analysts’ average projections by 2 cents. Sales of key cloud-based products exceeded the company’s outlook and Co-Chief Executive Officer Safra Catz said growth rates could rise further.

Oracle, facing challenges similar to those of longtime rivals IBM and Microsoft Corp., is starting to show signs of success in the cloud, even as sales of software licenses slump and other older businesses stagnate. As part of that effort, the company is rolling out an internal program meant to speed up and simplify how customers purchase new products, according to an internal e-mail obtained by Bloomberg News.

“One of the things that investors have really been waiting on is for that cloud traction to really take shape,” said Bill Kreher, an analyst at Edward Jones & Co. “I would definitely consider this traction.”

Oracle shares rose as much as 5.7 percent, the most intraday since December 2014, to $40.95 in New York before paring the gain to $40.62 at 9:36 a.m. The stock gained 6 percent this year through Tuesday.

Separately, Oracle said the board authorized additional repurchases of as much as $10 billion of common stock under its existing buyback program. It’s the first expansion of the repurchase plan since September 2014, according to data compiled by Bloomberg.

Revenue fell 3.4 percent from a year earlier to $9.01 billion during the fiscal third quarter from a year earlier, the Redwood City, California-based company said Tuesday in a statement. Analysts on average had forecast $9.13 billion, according to data compiled by Bloomberg. Sales increased slightly on a constant currency basis, Oracle said.

Net income in the quarter declined 14 percent to $2.1 billion, or 50 cents a share.

Quarterly Forecast

Catz said fiscal fourth quarter revenue will be in a range of 2 percent lower to 1 percent higher from a year earlier. Adjusted profit will be from 82 cents to 85 cents per share, compared with the company’s earlier forecast of 83 cents to 86 cents.

Co-Chief Executive Officer Mark Hurd has said the company is making the right investments to position itself in the market for cloud-based products. During the company’s major annual conference in San Francisco in October, he said virtually all of its product portfolio has been redesigned for the cloud.

Sales of key cloud products grew 57 percent to $583 million, a bright spot compared with sagging revenue in other services.

Oracle’s growth in those products -- on a constant currency basis -- topped the company’s earlier forecast, said Joel Fishbein, an analyst at BTIG. The “cloud business is reaching an inflection point, after multiple quarters of seemingly ‘kicking the can,”’ he said in an e-mail.

Bigger Gains

During a call with analysts, Catz said she expects sales in this area to grow 57 percent to 61 percent in the current quarter and “higher than the 59 percent midpoint” in the following quarter.

“Our cloud business is now in a hyper-growth phase,” she said. “Our gross margins are climbing toward our target of 80 percent.”

The company’s new sales program to simplify customer purchases, dubbed the Accelerated Buying Experience, is designed initially for the cloud, and later will be added to traditional products, according to the memo from Catz, Hurd and Executive Chairman Larry Ellison. The new service aims to streamline steps such as reducing approvals and shortening order documents.

“They’re obviously putting a ton of effort, money and resources into making themselves relevant in the cloud,” said Steven R. Koenig, an analyst at Wedbush Securities Inc. “That’s the key to their strategy, and it ought to be.”

Oracle reported $1.68 billion in revenue from new software licenses, falling 15 percent from a year earlier. Analysts watch that number for insight into how well the company can sell new products and services to first-time customers and existing clients. Revenue from software-license updates and product support rose less than 1 percent to $4.67 billion. Sales in the company’s hardware division dropped 13 percent to $1.14 billion.

Challenging Competition

The company faces a difficult challenge from rivals such as Salesforce, which increased revenue 25 percent during its fiscal fourth quarter, while Amazon said sales for its cloud service grew 69 percent in the quarter.

Microsoft is stepping up efforts for corporate customers who buy software that manages the reams of data produced by companies. Last week, the maker of Windows said its database software will be available for Linux systems, a popular customized open-source computer operating system. Oracle dominated that market in 2014 with twice the share of its Redmond, Washington-based rival.

Ellison expressed confidence in Oracle’s place in the market with so many applications already written using its database.

“People are coming after us because we are by far the market leader in database,” he said during the call.

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