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In the News: Oracle - This Is The Bottom For Earnings, Cloud Will Rain Cash Soon


Oracle Corp.’s shares have swung lower since the company’s earnings call late Wednesday, as investors mulled the diverging stories in its better-than-expected results, with sales of cloud software soaring 26% but also possibly taking away from the core business.

During the company’s call with analysts, Oracle co-Chief Executive Safra Catz said fiscal 2016 will be the low point in terms of operating earnings, calling it “a trough year for profitability as we move to the cloud.”

In the second fiscal quarter, Oracle’s operating earnings were down 17% to $2.9 billion (8% in constant currency), in part due to the impact of currency fluctuations.

“I expect to see strong EPS growth in Q1 and beyond,” Catz said.

The company also predicted that it was on target to “sell and book more than $1.5 billion” of cloud software products, with Chairman Larry Ellison touting its headway against rival Salesforce.com “That is considerably more SaaS and PaaS new business than any other cloud services provider including Salesforce.com,” he said.

Oracle’s shares initially jumped in after-hours trade Wednesday, after the company’s earnings and revenue beat Wall Street expectations, but then fell back as the call progressed.

On Thursday, the stock slumped 4% in morning trade.

While Oracle is making strong progress in the cloud, investors are keenly aware that cloud is still a small fraction of its overall revenue. In the quarter, Oracle’s total revenue in the cloud was $649 million, or 7% of its $9.0 billion in total revenue, which fell 6% from a year ago (flat in constant currency).

But at least that portion of the business is growing. A more important indicator of the company’s core business was that new software licenses for on-premises software were down 18% (or 12% in constant currency).

“While the company is showing some signs of cloud success, the meat and potatoes legacy database and app business is under major secular pressure,” FBR Capital Markets analyst Daniel Ives said in an email to MarketWatch.

At least one analyst on the call seemed slightly dubious of Oracle’s projections for cloud software, noting that the company would have to reap about $1 billion in the second half of the year in cloud. But co-CEO Mark Hurd said he was confident based on the company’s strong pipeline of sales for the next six months.

“You have a multi-billion dollar funnel, and our conversion rate is increasing,” he said. Earlier, he noted that he expects to see the first billion-dollar quarter in cloud next year.

As part of the transition to cloud, investors have been nervous about a negative impact on Oracle’s overall profit margins, as it replaces higher-margin installed software. But Catz and Hurd sought to reassure investors that gross margins in cloud are going to rise to between 55% to 60% in the third and fourth quarters, up from 43% in the fiscal second quarter, and 40% in the first.

The move is a juggling act as the company seeks to convert its current installed base to cloud-based systems, while maintaining and servicing those die-hard customers that want to take their time to move. Beyond the bluster of the company’s executives, investors are going to be closely watching the numbers.

Source: Oracle: This is the bottom for earnings, cloud will rain cash soon. Therese Poletti. Retrieved December 17, 2015, from http://www.marketwatch.com/story/oracle-this-is-the-bottom-for-earnings-cloud-will-rain-cash-soon-2015-12-16?dist=lcountdown

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