Oracle Q1 misses on revenue, all eyes now on the cloud business

Oracle continues to place faith in its smallest division, as it misses the mark on revenue due to currency headwinds

Oracle investors looking for signs of salvation are unlikely to find them in the Q1 results, published after the bell on Wednesday.

The database demon reported net income of $1.75bn, a 20% decline year-over-year or 8% in constant currency. Non-GAAP earnings were 53 cents per share on revenue of $8.45bn, down from $8.6bn in the year ago quarter. The company was once again hit by rough currency conditions and said that adjusted revenue would have been up 7%.

New license sales fell 16% to $1.15bn, while maintenance revenue held relatively steady at $4.7b.

Software and Cloud revenues came in at $6.5bn, a 2% fall year-over-year.

If one were to listen only to the Oracle PR machine, he or she could be forgiven for thinking that Oracle had successfully completed its transition was now the undisputed cloud king.  However, while cloud revenue accounted for 7% of total revenue, up from 5% last year, it still only equates to a meagre $611m of total sales.

There are, however, signs of hope beginning to germinate in the cloud division.

“We continue to see excellent momentum in SaaS and PaaS, with bookings growth of 165% this quarter on top of the 54% growth from Q1 of last year,” said CEO Safra Catz on a conference call with analysts. “SaaS and PaaS revenue was $452 million, up 38% from last year.”

Once again, founder, chairman and CTO Larry Ellison jumped at the opportunity to compare Oracle’s apples with Salesforce’s oranges.

“We are still on target to book between $1.5bn and $2bn of new SaaS and PaaS business this fiscal year,” Ellison said. “That means Oracle would sell between 50% more and double the amount of new cloud business than plans to sell in their current fiscal year.”

Ellison noted that the development stage of the cloud business had only just been completed and said that moving forward, there would be a period of rapid expansion.

“We've developed services at all four layers of the cloud,” he said. “We have deployed cloud services in 19 data centres and 14 countries around the world. We now have in place the physical infrastructure to dramatically expand our cloud customer base. We are entering the rapid growth scale out phase of our cloud business.”

Analyst firm TBR pointed out that Oracle was fully consumed by its smallest business unit.

“TBR believes that Oracle’s new software license sales will continue to decline at an accelerating pace as lower-value cloud subscriptions are adopted instead,” said analyst Meaghan McGrath.

Catz said that the cloud picture would improve with time. The business delivered a 40% margin in Q1 and she foresees this rising to 60% by Q4 and 80% within two years, as capital expenditures fade away and the accumulative force of the subscription model comes into effect.

“This margin improvement and relative maintenance revenue endurance foretells a better financial future […] but still leaves questions about the future of the remaining 93% of Oracle’ business,” TBR said.

Shares bounced around slightly in after-hours trading, before ending the day down by 1%.

Read more on Finance and Credit