Oracle's Bet on Cloud Computing Drives Growth -- 3rd Update

By Robert McMillan and Maria Armental Features Dow Jones Newswires

With Oracle Corp.'s shares hitting records this summer, the company Thursday reported earnings that gave investors further reason for optimism about the company's efforts to reinvent itself.

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Oracle shares, which initially rose in after-hours trading, fell 3% to $50.95 after company executives provided weak projections for the current quarter.

The 40-year-old seller of business software has spent billions of dollars over the past few years to transform into a postmillennium company selling web-based, on-demand computing services known as the cloud. That investment appears to be paying off as Oracle's cloud business again drove growth during the company's fiscal first quarter, which ended Aug. 31.

Sales of business software delivered over the internet as a service rose 62% to $1.07 billion. Sales of the services used by software developers to build applications on the cloud, called platform-as-a-service and infrastructure-as-a-service, rose 28% to $400 million.

Last quarter, Oracle began reporting its software-as-a-service figures separately, a sign the business has become more competitive, analysts said. But the company has now combined reporting on its platform and infrastructure businesses, making it harder to determine how each is performing.

The Redwood City, Calif., company said revenue climbed 7% to $9.19 billion. Earnings rose 21% to $2.21 billion, or 52 cents a share, from $1.83 billion, or 43 cents a share, a year earlier. When adjusted for stock-based compensation and other items, earnings were 62 cents a share, up from 55 cents a share a year earlier.

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Analysts had expected Oracle to earn 60 cents a share on an adjusted basis, on revenue of $9 billion, according to a survey of analysts by Thomson Reuters Corp.

This quarter, Oracle expects cloud revenue to increase 39% to 43%, helping drive a 2% to 4% revenue increase. Adjusted per-share profit, on a constant-currency basis, is expected to reach 64 cents to 68 cents, up from 61 cents a share in the year-ago period.

Analysts surveyed by Thomson Reuters had projected 68 cents a share with revenue increasing 4.7% from the year-ago period.

"The debate on Oracle has moved beyond, 'Will the business be destroyed?'" said Walter Pritchard, an analyst with Citi Research.

The trick for Oracle, said Ross MacMillan, an analyst with RBC Capital Markets LLC, is to build its cloud business even as its legacy software-licensing business declines.

That is particularly important in the platform-as-a-service and infrastructure-as-a-service businesses, where Amazon.com Inc. and Microsoft Corp. dominate, he said. Customers who choose to run Oracle's software on Amazon or Microsoft's cloud will be encouraged to buy more services from those vendors, rather than Oracle, Mr. MacMillan said.

Originally skeptical of cloud computing, Oracle has taken steps to become a cloud competitor in recent years. Last year, it spent $9.3 billion on NetSuite, a seller of business software delivered over the internet. Oracle also has set up a cloud-engineering center in downtown Seattle, not far from Microsoft and Amazon.

Asked about acquisitions during a conference call with analysts, Chairman Larry Ellison said, "There's no one left to buy. ... As we focus on the cloud, there aren't a bunch of obvious targets we can go out and buy." The bulk of the technologies that drive the company's growth, Mr. Ellison said, are developed internally.

Last year, Oracle sold $4.57 billion worth of cloud services -- accounting for 12% of its revenue. That was up from $2.85 billion, or 8%, the previous year. In the first quarter, cloud services accounted for 16% of revenue.

Oracle also has benefited from the fact that its legacy software business hasn't declined as quickly as analysts had expected, Mr. MacMillan said. Sales of Oracle's traditional on-premise software products, which are installed and run at a customer's location, accounted for 65% of the company's business in the latest period, bringing in $5.92 billion, a 1.6% increase from the year-ago period.

"There are still a lot of customers who chose to deliver on-premise today," Mr. MacMillan said.

Write to Robert McMillan at Robert.Mcmillan@wsj.com and Maria Armental at maria.armental@wsj.com

(END) Dow Jones Newswires

September 14, 2017 19:11 ET (23:11 GMT)