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Oracle profit slides 24 percent as customers move to the cloud

James Niccolai | June 18, 2015
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.

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 revenue and profit for the quarter, the fourth of its fiscal year, missed the forecasts of financial analysts, and its stock fell almost seven percent after the results were announced Wednesday.

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. A strong dollar can hurt the revenue of U.S.-based multinationals, because sales appear smaller when they're converted back from foreign currencies.

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.

 

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