Oracle Q1 '16: Investment In Cloud Apps Is About To Really Pay Off

Oracle saw a slight drop in its fiscal first quarter 2016 revenue, despite strong growth in its cloud business, the company said Wednesday. But the company expects revenue growth to accelerate as its cloud business grows at a stronger pace in the second quarter, thanks to customers -- many of whom have finished testing -- signing new contracts.

For its first quarter of 2016, which ended Aug. 31, Oracle reported revenue of $8.4 billion, down about 2 percent from the $8.6 billion it reported in the first fiscal quarter of 2015.

Part of that drop was caused by currency head winds, according to Oracle, which estimated that revenue increased 7 percent over 2015's same quarter in constant-currency terms.

[Related: Longtime EMC, VMware Storage Exec Chuck Hollis Jumps To Oracle]

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Oracle's software revenue, which includes both cloud-based and on-premise software, reached $6.5 billion, which was down from 2015's same quarter. Included in that figure were Software-as-a-Service (SaaS) and Platform-as-a-Service (PaaS) revenue of $451 million, up 34 percent over 2015's first quarter, and cloud infrastructure as a service (IaaS) revenue of $160 million, up 16 percent.

Cloud software revenue, however, is still overshadowed by the company's on-premise software revenue of $5.8 billion, which fell 4 percent from the same quarter of 2015.

Hardware revenue in the quarter fell 3 percent, to $1.1 billion, while services revenue rose 1 percent, to $862 million.

On a GAAP basis, Oracle reported first-quarter income of $1.7 billion, or 40 cents per share, down significantly from 2015's first quarter $2.2 billion, or 48 cents per share. On a non-GAAP basis, Oracle earned $2.3 billion, or 53 cents per share, down from $2.7 billion.

Oracle reported its financials after the close of the trading day. Before the close, Oracle's shares were up slightly, to $38.35 per share, but fell after the close because revenue missed analysts' expectations, and were trading below $37.75 a couple of hours later in the after-hours trading session.

Oracle CEO Safra Catz said during the Wednesday analyst call that Oracle's on-premise software business was steady and growing modestly, but that its cloud-based business was showing much higher growth, leading to overall revenue growth going forward.

"The triple-digit growth in SaaS and PaaS revenue we've been experiencing will lead to increased growth in the second half of the year," Catz said.

Oracle Chairman Larry Ellison called Oracle a "startup" during his prepared remarks on the analyst call.

"Over the last three years, we've been in the startup phase in the cloud business. ... We are now entering the rapid-growth, scale-out phase in our cloud growth," Ellison said.

Catz, in response to an analyst's question, said she is confident that Oracle's cloud business will lead the company to growth going forward, in part because revenue has just started, and in part because the bulk of the capital investment in building the cloud business has already been made.

Also, Catz said, it helps that Oracle provides all the software, hardware and labor related to the cloud bundled in such a way that customers actually spend less than they would on alternatives.

"And because it's all our own [intellectual property], we can do it at a lower cost," she said. "And the more we scale, the more we profit."

When another analyst asked why Catz is so confident in the growth of Oracle's cloud business, despite its having so far ramped up more slowly than expected, she replied that the strong growth is inevitable.

"It can't not happen. ... It's inevitable that the second half will be significant," she said.

Catz's co-CEO, Mark Hurd, echoed her comments. "We have the contracts," Hurd said. "To Safra's point, it's not a guessing game."

Ellison, when asked by an analyst about whether the customer transition to the latest version of the Oracle database software will slow growth to the cloud, said he expects no impact because the company is already encouraging customers to do their testing and development on the cloud version of the software.

"We think [the cloud] lowers their costs and raises our profit. ... They spend less, and we get more," Ellison said.

Hurd said Oracle is unique in that it can deliver its database application both in the cloud and on-premise at the same time, and allow the data to be moved between them as needed.

"This is a huge differentiator only this company has," he said. "Nobody else can do it."

Ellison then offered a sneak peek at a new version of the Oracle Exadata engineered database system it plans to roll out next month at Oracle Open World. Ellison called it "Exadata as a Service," and said the new offering will allow customer to run databases on the Exadata both on-premise and in the cloud with the same tools while moving data between the two as needed.

Catz said that the second fiscal quarter 2016 should see revenue growth over the second quarter of 2015, on a non-GAAP basis, of 36 percent to 40 percent for its SaaS and PaaS business, 5 percent to 9 percent for its cloud IaaS business, and as much as 2 percent for its cloud and on-premise software business. She said Oracle also expects second fiscal quarter 2016 total revenue to be down 2 percent to up 1 percent.

"We feel very good about our cloud transition. ... Over time, we feel confident we will take market share," she said.