Oracle Sails Uncertain Course

Oracle sails an uncertain course. Aivars Lode avantce

Oracle Sails Uncertain Course

By

Spencer Jakab

Sept. 17, 2014 4:01 p.m. ET

A year after one of the most remarkable comebacks in history, Oracle Corp.ORCL -0.12% is seeking an encore.

The prospect of doing so in the software business is better than the 250- to-one odds the company's yacht team at one point faced during The America's Cup. But doubters still abound, and it isn't hard to see why.

Oracle's fiscal 2014 results were disappointing. Revenue was up by 3% from the previous year and operating income was just 1% higher. Even worse, crucial sales of new software licenses were flat. Those feed through to ongoing payments for updates and support, Oracle's most stable and important source of sales.

The company stressed the waters weren't so choppy. The way cloud-service revenue is recognized—over time rather than up front with license sales—made its income statement look weaker. But total cloud revenue is only about one-sixth the size of traditional software sales, so the impact couldn't have been so substantial.

And even if Oracle on Thursday meets or beats analysts' earnings projection of 51 cents a share for the fiscal first quarter through August, compared with the year-ago quarter's 47 cents a share, investors will be left with questions. In particular, they will be looking for signs of how quickly cloud services are growing and how profitable they can be.

"The cloud" means three businesses at Oracle. The first, infrastructure, is mired in a price war with the likes of Rackspace Hosting Inc. RAX -17.67% andAmazon.com Inc. AMZN -1.15% that has battered margins. The latter two, software and platform as a service, are far better and growing quickly, bolstered by acquisitions.

Chief Executive Larry Ellison insists this area can earn better margins than the existing software business, in the range of 40% to 50%. That doesn't seem boastful, if and when the cloud software and platform businesses reach a certain size. His ambition of being No. 1 in cloud computing isn't entirely fanciful, either.

Unfortunately, even if it becomes a cloud giant, Oracle's reliable software-support-and-update income stream will suffer. That, plus slow growth overall, explain Oracle's subdued trailing earnings multiple of just 17 times.

Unlike a winner-take-all race, though, Oracle merely has to do better than the market's bookmakers believe. By no means will it be smooth sailing, but it has the wind at its back