Oracle needs to find a bigger lift into the clouds
Without major purchase, investors should stay away
The latest quarterly results from Oracle show how the shift to cloud computing is putting a major dent in the software giant’s sales growth and profitability.
Like the results from its previ- ous quarter, the numbers strongly suggest Oracle is going to need a major cloud-related acquisition in 2016 to prevent the trend from further damaging its finances.
Hurt by falling overall revenue, the company’s operating income dropped 17% for its fiscal second quarter ended Nov. 30, compared with the same period a year ago.
Oracle’s bottom line, meanwhile, also suffered a double-digit drop, as net income fell 12% yearover-year, to $2.2 billion.
For its fiscal first quarter ended Aug. 31, Oracle had reported a 10% drop in operating income and a 20% plunge in net income.
Just as troubling for the company’s shareholders is Oracle’s shrinking top line.
Overall revenue in the November quarter fell 6% versus a year earlier, following a 2% year-overyear slip in the prior quarter.
The company’s revenue from new software licenses has fared even worse, dropping 18% and 16%, respectively, during the last two periods, on a year-over-year basis. Those numbers are especially troubling, because fewer new customers this fiscal year will translate into less revenue from software updates and sup- port in the future. And that recurring revenue stream has been among the company’s most lucrative businesses for decades.
Oracle likes to tout its own cloud business and now puts those numbers at the top of its statement of operations.
Those numbers show strong growth, as cloud revenue rose 26% in the most-recent quarter, compared with a year earlier. Yet that number decelerated from 29% growth in the August quarter, and cloud-related revenues remain just 7% of Oracle’s total.
In other words, Oracle’s cloud push has so far been unable to move the financial needle enough to stem the drop in sales and profit. The company’s operating margin — or operating income as a percent of revenue — fell to 33% for the quarter ended Nov. 30, down from 37% a year ago.
In the August quarter, it had fallen to 31% from 34%.
The less-profitable start to the company’s fiscal year has been noticed by tech investors, who’ve pushed its shares down 16% so far in 2015. The stock dropped 5% Thursday in the wake of its latest results. All this points to a need for Oracle to either pull the trigger on a major acquisition or risk more of the same as its customers move to the cloud.
Acquiring a company the size of Salesforce, the cloud computing pioneer valued at $52.5 billion, would be risky, to be sure.
Yet Oracle has moved before on huge deals, as when it bought software rival PeopleSoft for $10.3 billion a decade ago.