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Oracle: Q3 Results Don't Adequately Reflect Potential For Cloud Growth

The software giant's leaders tell investors its still early days for migrating its install base, cloud numbers are skewed by a bring-your-own-license policy, and the 18c database is about to drive sales.

While Oracle's cloud business is driving growth at the software giant, the company's leaders said on Monday's earnings call that its Q3 financials do not adequately reflect the massive opportunity in the market from converting its on-premises installed base to cloud services.

Oracle's total third-quarter revenue came in at $9.8 billion—a 6 percent year-over-year increase. Software revenue—both from cloud and license sales—accounted for $8 billion, growing at 8 percent, the company reported in non-GAAP terms.

While Oracle is making a big push to position itself as a major cloud services vendor, on-premises license sales still comprised two-thirds of all software revenue in Q3, grossing $6.42 billion for the quarter ended Feb. 28, Oracle Co-CEO Safra Catz reported to Wall Street.

[Related: Oracle Bets Big On Cloud With Data Center Buildout]

Oracle has yet to reach an inflection point in converting its on-premises customers to the cloud, Co-CEO Mark Hurd said, with less than 15 percent of existing Oracle users having even begun migrations.

"Just moving the user base does turn us into a very large SaaS business," he said. But "the bulk of what we book today is outside our user base. We are gaining share from other companies."

One of the biggest Oracle ERP users only recently completed its migration to the cloud, "and that would be us," Hurd said, telling investors the entire company now runs on its cloud-based business management platform.

Hurd said the Redwood Shores, Calif.-headquartered company's cloud business hit a $6.3 billion run rate in the quarter that closed.

The cloud numbers will gain steam in future quarters from the Oracle 18c database that hit the market a few weeks ago, said Oracle founder, chairman and CTO Larry Ellison.

The "self-driving" database, Ellison told investors, "is maybe the most important thing Oracle has ever done in terms of data management."

Oracle expects the bulk of its customers will eventually use the autonomous database platform that minimizes human labor, automates patching, and can be migrated to with the press of a button, Ellison said.

"We expect it's going to change the profile of our company forever," Ellison said of 18c.

The overall cloud figures, Ellison noted, are skewed by Oracle's recently introduced Bring-Your-Own License policy that allows revenue from databases and other software running in the cloud to be recognized as license deals, according to Ellison.

"There's no question BYOL has lowered our cloud revenue and increased our license revenue in technology," Ellison said.

"More and more of our licenses are being deployed in the cloud, and not just Oracle's cloud," Ellison emphasized. Oracle software is also running in the clouds of rivals like Salesforce, SAP, Microsoft and Amazon.

For that reason, "license is not a legacy business," Ellison said.

Fusion, a product that can't be accounted for as a license transfer because it is an entirely new service, reflects the true potential of Oracle's cloud portfolio, he said.

The Software-as-a-Service suite encompassing major enterprise management systems like ERP and HCM, scaled revenue by 65 percent in the third quarter.

Oracle's entire Software-as-a-Service catalog grew 33 percent to $1.2 billion in the quarter. Applications delivered both as licenses and services were up 9 percent, producing $2.7 billion in revenue.

Platform and infrastructure software grew by 8 percent to $5.3 billion. Platform-as-a-Service and Infrastructure-as-a-Service, however, only accounted for $415 million of that amount—up 24 percent year-over-year.

Oracle also incurred a $6.9 billion one-time net charge due to the 2017 Tax Cuts and Jobs ASct, the new tax law, Catz said.

As far as guidance, Catz said Oracle projects total cloud revenue to grow between 19 and 23 percent in the next quarter, while total revenue, in dollars, should rise by 1 to 3 percent.

While Oracle beat earnings forecasts—delivering 83 cents per share when analysts expected 72 cents, according to Thomson Reuters—those guidance figures dragged down the stock.

Analysts were looking for higher projections for overall and cloud growth. Oracle shares fell in after-hours trading to $48.40 at publication time, after a close Monday at $51.95 per share.

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