As Ellison steps back Oracle Q1 FY2015 misses, soft outlook

Profile picture for user gonzodaddy By Den Howlett September 18, 2014
Oracle Q1 FY2015 miss triggers soft forecast as Ellison steps back from CEO role.

[sws_grey_box box_size="690"]SUMMARY - Oracle Q1 FY2015 miss triggers soft forecast as Ellison steps back from CEO role. [/sws_grey_box]

oracle Q1 FY2015 stock price
Oracle stock price after hours on Q1 FY2015

All eyes might well have been on the announcement that Larry Ellison is stepping back from his role as CEO Oracle but that could not hide the fact that Oracle missed its Q1 FY2015 analyst forecast and is putting out a softer prediction for the remainder of FY2015.

This can't be good news and in after hours trading, the market duly hammered the stock price.

What happened?

Check the image below to get a sense of the top line numbers:

oracle Q1 FY2015

While the top line new software license softness at $1.37 billion looks poor, it was more than offset by SaaS and PaaS revenue growth. That's a good sign.  As an aside, the relative numbers provide Oracle management an opportunity to talk up SaaS growth rates which were impressive at 32%.

With Ellison stepping back, it was left to one half of the new CEO, Safra Catz, to rattle the sabres in a cloudy direction:

Q1 results in the cloud were better than expected and with us now three times bigger than Workday, now that's not enough for us, as our goal is to be bigger than Salesforce and faster growing than Workday while growing cash flow and improving our already high levels of profitability.

The real culprit is the beleaguered hardware systems business where revenue fell 14% year-over-year to $578 million as demand for UNIX servers declines. Taken together, it is clear that despite many industry analysts believing Oracle's engineered systems story, buyers are not so enamored. Yet.

The other half of the CEO, Mark Hurd, obviously took a more upbeat line:

We declined in SPARC in this quarter while we grew engineered systems double-digits. Engineered system now makes up a third of our hardware. While we're growing double digits our competitors are declining double digits. We shipped our 10,000th engineered system in Q1. Lifetime bookings in hardware alone for engineered systems now exceed $3 billion. Hardware support margins are now approaching 70% as a testimony to the change in our overall hardware mix and the stickiness of this business.

On the expense side, Oracle did a sterling job maintaining cost control and showed solid operational profit across all product lines. Maintenance remains the real money spinner with margins of 94% but SaaS/PaaS hit a none too shabby 55% margin. Net-net, Oracle's net operating income crept higher by three percent. Most important, it shoveled an extra net $4.4 billion cash into its coffers over the year while continuing a fairly aggressive share buyback program.

Looking forward, Oracle is projecting 0-4% growth where the market was expecting 4.8%. Oracle largely blames near-term weakness on a transition to cloud subscriptions from up-front licenses. Catz stated:

Customers have started to move from on-premise systems to the cloud but with so many on-premise customers and only 30% of our support-base in applications we haven't seen a reduction in software updates and product support renewal rates which continue at their usual high levels.

However as the movement to the cloud grows we expect this transition will affect our revenue to the positive. These customers will essentially replace their software support payments with a cloud subscription which will mean substantially more revenues to Oracle.

It admits execution issues are hurting hardware and services sales and from what we have heard, Oracle is struggling to retain it best sales people.

My take

A set of results overshadowed by the Ellison bombshell, but one leaving the new twin-headed CEO with obvious work to do.

Disclosure: at time of writing, Oracle, and Workday are all premium partners of diginomica.