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Oracle shares pummeled after giant reports glacial growth

Oracle claims it is world's second largest SaaS provider, but core products stagnate

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Oracle's shares dropped sharply after the database giant reported results that – yet again – missed analysts' expectations.

Ellison & Co. reported revenues of $11.32bn and an earnings-per-share (EPS) of $0.92 for its fourth financial quarter of 2014 on Thursday, missing analyst expectations of $11.48bn and an EPS of $0.95. Revenues for the full year were $38.3bn, compared to $37bn last year.

Net income for the quarter was $3.646bn, down 4 per cent on $3.807bn from the same quarter a year ago. Oracle shares fell 6 per cent in after-hours trading following the publication of the results. The company also missed EPS estimates last quarter.

Though the company did not miss estimates by a wide margin, it faces an increasingly tough market full of young startup companies and new technologies that threaten its core business model.

This showed in the results, with software-license revenues for the quarter remaining flat at $3.8bn, while software-license updates and product-support revenues rose 7 per cent to $4.7bn, indicating trouble in acquiring new customers. New software licenses for the 2014 financial year were $9.416bn, compared to $9.411bn for 2013 – scant growth, and none at all when you factor in inflation.

The company continued to see slow growth in its troubled hardware division, with hardware-systems product sales at $870m compared to $752m in the previous quarter, and $849m a year ago.

"We have transformed Sun's commodity hardware business into a profitable and growing Engineered Systems business," Oracle President Mark Hurd said in a statement. "We saw record levels of Engineered Systems shipments and expect to deliver our 10,000th unit in Q1."

Oracle sought to reassure investors that it is rolling with the changes rippling through the tech market.

"Our cloud subscription business is now approaching a run rate of $2 billion a year," said Oracle President and CFO Safra Catz in a canned statement. "As our business has transitioned, more software revenues are being recognized over the life of a subscription rather than upfront. We're making this transition to cloud subscriptions and ratable revenue recognition while continuously increasing our top-line revenue and our bottom-line profits year-after-year."

Oracle's software-as-a-service and platform-as-a-service revenues were up 25 per cent year-on-year to $322m, while cloud infrastructure-as-a-service revenues were up $128m.

In the past year, Oracle has reacted to the threats posed to its business by the rise of both cloud computing and upstart database technologies. It has sought to battle back both by increasing the capabilities of its mainstay software via efforts such as the just-announced in-memory option for its database, and involving itself in the cloud by joining both the OpenStack and OpenDayLight foundations.

It has also thrown more money at specific software-as-a-service products, such as marketing cloud acquisition Eloqua, as it tries to diversify revenues away from its traditional products, and has partnered with Salesforce, Netsuite, and Microsoft to help it sell its software via the cloud.

"Oracle is now the second largest SaaS company in the world, said CEO Larry Ellison in a canned statement. "In SaaS, we're in front of everybody but salesforce.com. In IaaS we're larger and more profitable than Rackspace. We have by far the most complete portfolio of modern SaaS and PaaS products in the industry: CRM: Sales, Service & Marketing; HCM: HR, Payroll & Talent; ERP: Accounting, Procurement, Supply Chain & more. All these SaaS products run on the world's most powerful PaaS: the Oracle in-memory multitenant database and Java. We plan to increase our focus on the Cloud and become number one in both the SaaS and the PaaS businesses."

Though SaaS, PaaS, and IaaS are strategic areas for the company, they are not nearly large enough to offset the stagnation in Oracle's core business. Judging by the brutal fall in its share price after hours, the company will have to persuade investors it can find some way to grow. As we've said before, the problem Oracle faces is that the business model required to compete in a cloud computing–centric world is not the same as one required to sustain a company accustomed to high-margin and reliable recurrent revenue. ®

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