Oracle To Wall Street: Our Fourth-Quarter Miss Was Good News

Larry EllisonAP Photo/Eric RisbergOracle CEO Larry Ellison

Oracle CEO Larry Ellison had a great explanation as to why the company missed fourth-quarter and full-year revenue expectations: Oracle is actually kicking butt.

It sold a lot of new cloud-computing contracts and that revenue won’t show up right away, he explained to Wall Street analysts on the company’s quarterly conference call.

Another fourth-quarter miss for Oracle is particularly shocking. That’s always the company’s biggest quarter, as salespeople push to close deals and make their annual quotas and bonuses.

To be fair, Oracle didn’t have a bad quarter or year. It grew sales 3% for the year, to a record $US38.3 billion. It dropped $US13.2 billion to the bottom line in net income (non-GaaP, excluding unusual items), up 2% over last year.

Still, this is two years in a row that Oracle missed Wall Street’s expectations for its fourth quarter instead of meeting, or even exceeding, them.

And investors were not pleased. The stock tanked in after-hours trading. It’s currently down about 5% to about $US40 a share, compared to Thursday’s closing price of $US42.51.

Why More Cloud Is Bad For Revenue, Good For Business

But Ellison and CFO Safra Catz had a good explanation: the company is selling a lot of cloud services, in some cases instead of regular software.

For the first time, Oracle broke out how well its cloud services are doing: The Software-as-a-Service and Platform-as-a-Service clouds were up 23% to $US1.1 billion (on a GAAP basis), while the Infrastructure-as-a-Service revenues were $US456 million for the year.

That’s still a pittance compared to Oracle’s software business: $US9.4 billion worth of new software licenses revenues for the year (flat over last year) and $US18.2 billion worth of product support and licence updates, up 6%.

Still, selling a lot of cloud will make a company look like its revenue has stalled.

With a software contract, the revenue is recognised right away. But the cloud is a subscription billed over time. Revenue is only recognised when the monthly/quarterly/annual bill is paid.

But cloud is better for a software company over the long haul. Customers will pay more money for it over time. They save in other ways, because they don’t need to buy hardware.

Eye On The Profitable Cloud, Not The Cheap One

There are three types of cloud-computing services, and Ellison wants Oracle to dominate two of them because they are the most profitable.

“Oracle is focused like a laser on one goal over the next few years: becoming the No. 1 company in cloud computing in the two most profitable segments: Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS),” Ellison said.

SaaS is when companies rent software applications over a network like the internet. is the best-known SaaS company. PaaS is when companies use the cloud to host the apps that they have written. This is what app developers use.

The third is called Infrastructure-as-a-Service. It’s currently dominated by Amazon, which keeps cutting prices, making it a low-margin game.

IaaS is when companies rent servers and operating systems and run whatever software they want on that. Oracle offers IaaS, too, but Ellison is not keen on pushing that business, he said.

That’s because he’ll reel in 40% to 50% margins for SaaS and PaaS, he says, the same margins as Oracle is making now selling software. It can do that because Oracle owns all the pieces necessary to run a cloud, including the hardware, the development software (Java), the database and the apps.

“We buy electricity and buildings, everything else we make. We think we can deliver these cloud serves without compromising margins whatsoever,” he said.

A Better Way To Prove Success

Still, if Oracle really wants to convince investors that it owns the cloud, there’s an another way to do it: Show them the money.

In addition to reporting cloud revenues on its individual services, it could showcase cloud bookings, backlog or Annual Recurring Revenue (ARR), or some other figure that indicates the amount of money under contract, not yet billed.

If that number takes off, so will investor confidence in Oracle’s future.

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