Oracle Corp. is making progress in shifting to the cloud, but the rising value of the U.S. dollar is getting in the way.
Those twin themes emerged Wednesday in Oracle’s results for the latest quarter and guidance for the current period that was lower than Wall Street expected.
The Redwood City, Calif., maker of business software said net income fell 20% in the period ended Aug. 31, but was off only 8% excluding currency effects. Total revenue, off 2%, was up 7% on a constant-currency basis, Oracle said.
The rising dollar also exacerbated a decline in Oracle’s sales of new software licenses, a closely watched metric for customer demand for its databases and other business applications. Oracle said new licenses declined 16% in dollars, or 9% in constant currency.
With demand weakening for software that businesses run on their own computers, Oracle has bolstered its offerings of services that run in the “cloud” on Oracle’s computers.
In the latest period, ended Aug. 31, cloud revenue rose nearly 29% to $611 million, Oracle said. But that still accounted for only 7% of Oracle’s quarterly revenue.
“We are entering the rapid-growth, scale-out phase of our cloud business,” said Larry Ellison, Oracle’s chairman, during a conference call with analysts.
A shift from software sales to a services business has many implications for a company’s income statement. Rather than booking revenues when a sale is made, for example, cloud companies book revenue over the course of a contract, recording deferred revenue on the balance sheet.
Building data centers to supply cloud services also can cut into profit margins. Mr. Ellison emphasized that the company’s cloud margins should improve rapidly now that its build-out of data centers is largely completed, doubling from about 40% in the first quarter to 80% over the next two years.
“What they are basically trying to signal is that their margin profile could continue to improve in the face of this transition,” said Bill Kreher, an analyst at Edward Jones. “But it remains a bit of a show-me story.”
Overall, Oracle reported a profit of $1.75 billion, or 40 cents a share, down from $2.18 billion, or 48 cents a share, a year earlier. Excluding stock-based compensation and other items, profit would have been 53 cents a share, compared with 62 cents a year earlier. Analysts surveyed by Thomson Reuters, on average, had projected a profit of 52 cents a share on that basis.
Total revenue declined to $8.45 billion from $8.6 billion a year earlier. Analysts had projected $8.53 billion.
Safra Catz, Oracle’s co-chief executive, projected further strong growth in the company’s cloud business in the current period. But she said total revenue, on a constant-currency basis, would range from declining 2% to rising 1% from the year-earlier quarter. She put adjusted earnings per share at 63 cents to 66 cents.
Analysts had projected earnings of 65 cents a share on $9.54 billion in revenue, indicating a decline of about 1%.
The first quarter results and guidance show “there is still heavy lifting ahead,” said Daniel Ives an analyst with FBR Capital Markets.
Oracle shares declined nearly 2% in after-hours trading.