Oracle evasive after new cloud reporting doesn't deliver results

Larry Ellison (Oracle)

Oracle would have hoped to be delivering better news in its first set of earnings for the 2019 fiscal year, having changed the way it reports cloud revenues.

The results showed stagnant revenue growth, leading to a sharp drop in the vendor's stock after hours, so what did Oracle leadership have to say for themselves?

For context, back in June the database specialist announced that it would be changing the way it reports its cloud results every quarter.

Where it used to report two cloud revenue segments - software-as-a-service (SaaS) as one and then a combined figure for platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS) as another, smaller, figure - now it is reporting just one figure: cloud services and licence support.

So for Q1 2019 the vendor reported that the cloud services and licence support segment only grew three per cent year-on-year, down from 10 per cent in the last quarter of 2018. Total revenue was up one per cent to US$9.2 billion, which was also behind expectations.

"Looking at the one per cent total revenue growth in Q119, we can surmise that the rate of cloud growth has plateaued as on-premise sales continue to fall," said Angela Eager at Tech Market View.

"Barely there growth combined with cloud opacity in Q119 sent Oracle shares tumbling nearly 5 percent in after hours trading... The wrong clouds appear to be hanging over Oracle."

Analysts at KeyBanc Capital Markets have lowered their estimates for Oracle's next few quarters as a result. "Oracle's move to the cloud is taking longer than expected, is consistent with what we have heard from the channel, and with reduced disclosures, we have lesser visibility into then company's progress," as reported by CNBC.

Speaking on the earnings call after the results yesterday, co-CEO Safra Catz put a brave face on things.

"Total cloud revenues grew in all regions and in terms of product categories, ERP grew in the 30 per cent plus, verticals grew in the 40 per cent plus and public cloud, PaaS and IaaS grew in the 20-plus per cent," she said. (All quotes from the earnings call are via Seeking Alpha's transcript).

Mark Moerdler of Sanford Bernstein asked why the newly combined cloud services and licence support was down on analyst expectations, only for Catz and co-CEO Mark Hurd to dodge the issue and blame the results on currency fluctuations.

"Well, I think most of - any kind of what miss from the numbers you have was that in fact there was really just some currency difference between when I gave my guidance and when and what it ended up being," Catz said. "So, it was basically double the negative that I was expecting." Make of that what you will.

The problem here is that the new reporting model allows Oracle to be extremely vague when it comes to its cloud performance, leading to frustratingly evasive answers from leadership.

For example: "I think I talked about the SaaS bookings growth. Our bookings overall in cloud for the quarter accelerated on a rate basis. The growth rate accelerated. So, that was obviously a good indication for us of overall bookings growth," Hurd added.

There was further controversy this week as it was revealed that president of product development Thomas Kurian was taking an indefinite leave of absence after reportedly falling out with chairman Larry Ellison over the company's cloud strategy.

Hurd was curt on this point, telling analysts: "On Thomas Kurian, which I think was your question. Thomas is a good guy, works hard. He's taken a break and we expect him back."

Strategy

Ellison attempted to boil down Oracle's cloud vision in one fell swoop yesterday, telling investors: "Oracle has two strategic products that will determine our future. Our cloud ERP product is the strategic key to our success in the SaaS applications layer of the cloud.

"And our autonomous cloud database is the strategic key to our success in the IaaS or infrastructure layer of the cloud."

Ellison was typically bullish on the call, pushing the line that Oracle will eventually win out due to its technical superiority and again prodding rivals for their reliance on Oracle software to run their own businesses.

"The Oracle database is so much better than other databases," he said. "Even our biggest competitors use it to run their businesses. Salesforce.com uses Oracle to run their Sales Automation Cloud.

"SAP uses the Oracle database to run their cloud services and nearly all their on-premise customers. Even Amazon uses the Oracle database to run most of their business."

Speaking about the company's latest product, the autonomous cloud database, Ellison said: "We think these compelling advantages will allow us to compete very effectively against Amazon in the infrastructure business.

"Today, we may be behind Amazon in infrastructure market share, but we are way ahead of Amazon in cloud infrastructure technology. We think that will allow us to gain market share in infrastructure in the cloud very, very rapidly."

Co-CEO Mark Hurd expanded on this, stating his view that getting adoption from fellow technology vendors (ISVs) is a good market signal for the company: "When you start seeing these early indicators, ISVs move. And that's one of the reasons I outlined the ISVs. This is really good news because ISVs are some of the most discriminating."

Hurd naturally wanted to push this long-term outlook too, saying: "I'm trying to focus here more on the revenue in long run is I think the best indicator of where we are.

Bookings to us - it was a good description before we have revenue. And so, what I'm trying to do now is keep you focused on really what the prize is, because if the bookings don't translate to revenue, they don't mean anything to us."

Customers

Hurd preferred to talk about customer wins than figures on the call. "I'm going to try to keep it to a few. But, I want to give you a flavour for some of the wins that - on top of what we did in Q4 what we did in Q1, and talk first about ERP and what we did in that category," he said, specifically referencing Academy Sports, Conn's and Legg Mason.

Another big-name win in the quarter for Oracle was Airbnb. "They bought ERP. And Larry mentioned: this is actually a replacement of Workday Financials at Airbnb," Hurd said on the earnings call.

He also spoke about FedEx's decision to standardise on Oracle: "A traditional Oracle user, they bought a company called TNT in Europe that was an SAP user, and they are now going to standardise all of their ERP on Oracle Fusion ERP.

"In addition to that, they bought payroll from us in the quarter. They happened to be a Workday HCM customer but bought payroll from Oracle.

"This is one of the most significant transactions we've had over a course of a number of significant transactions, but a very strategic and significant one with a replacement of SAP as a combination of a migration of an existing Oracle customer.

"I hope you can tell by these wins, our SaaS pipeline is at a record level, and to Larry's point, led by both ERP. And that's not just Fusion now, but the NetSuite improvement is material and significant. Our pipeline in PaaS is also at the highest level it's been.

"And it was overall solid quarter for us. Looking forward to Safra's point earlier, we do expect revenue growth in the second half to be higher than last year and [earnings per share] will grow double digits for the year."