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Oracle’s latest cloud growth fails to convince

Can the database giant fill the gap in its declining legacy revenue with cloud?

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Confidence in Oracle's ability to make up for a declining legacy business by boosting cloud revenues took a hit today, when the database giant released its latest financial results.

Cloud revenue year-on-year growth hit 29 per cent in Oracle's latest quarter, raking in $611 million, and kept pace with the last two quarters' growth of 28 per cent in the three months ending May and 30 per cent before that.

SaaS and PaaS services earned the company $451 million, up 34 per cent year-on-year, and IaaS grew 16 per cent to $160 million.

Viewed as a whole, cloud contributed seven per cent of Oracle's overall $2.7 billion revenue for the quarter, up from five per cent in the same period of 2014.

However, new on-premise software licenses, which represent 16 per cent of Oracle's total takings, dropped 16 per cent year-on-year to $1.15 billion, and total on-premise revenues worth 70 per cent of overall revenue - dropped four per cent to $5.8 billion.

It left Oracle to defend an overall revenue decline of two per cent to $8.4 billion, with shares falling 3.25 per cent at the time of writing.

Analyst house Creative Intellect Consulting questioned whether the tech giant could replace legacy declines quickly enough with cloud revenues.

Principal analyst Ian Murphy told IT Pro: "With physical licenses dropping and they're not replacing those with cloud licenses, there is a significant gap there."

While Oracle co-CEO Mark Hurd claimed new cloud bookings grew 150 per cent over the quarter, Murphy said this success was not reflected in the company's latest set of financials.

"That 150 per cent is a big positive," he said, but added: "[The cloud growth] is not what we would have expected to see from Oracle if they were successfully converting existing customers and winning new ones."

Oracle was nevertheless bullish on its cloud prospects, with co-CEO Safra Catz setting aggressive growth targets for its cloud margins, planning to double them over the next two years.

"Rapidly growing cloud revenue combined with a doubling of cloud margins will have a huge impact on EPS growth going forward," she said in a statement.

But doubling margins of small cloud revenue will not fill the gaps in falling legacy software earnings, analysts warned.

"All in all, Oracle is under intensifying attack on multiple fronts," wrote TechMarketView analyst Angela Eager, pointing to threats from rivals Salesforce, Workday and SAP, as well as the investment Oracle is making in transitioning to the cloud.

Murphy argued that the firm must make moving to its cloud a more attractive prospect to customers by adjusting its pricing, saying IBM has made its software licensing more flexible for customers of its private cloud mainframe, System Z.

Oracle CTO and founder, Larry Ellison, said the firm remains on course to book up to $2 billion new SaaS and PaaS business this fiscal year.

"That means Oracle would sell between 50 per cent more and double the amount of new cloud business than salesforce.com plans to sell in their current fiscal year," he added.

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