Oracle Stock Plunges on Underwhelming Earnings -- but Don't Sell Yet

Oracle stock

Oracle headquarters in Redwood City, CA, Credit: Wikimedia Commons.

Oracle Corporation (NYSE: ORCL  ) just became the second-largest cloud software-as-a-service company in the world; but that's little consolation to its shareholders right now. Oracle stock is currently down 7% in after-hours trading following the release of its fiscal fourth-quarter 2014 results.

So, what happened? First, quarterly revenue rose just 3%, to $11.3 billion, missing Wall Street's expectations for sales of $11.48 billion. Meanwhile, Oracle's adjusted earnings per share fared slightly better, increasing 6%, to $0.92. To its credit, Oracle notes this figure would have been $0.94 per share had it not been for non-operating losses caused by exchange-rate changes in Venezuela. But even then, the tech giant still would have fallen short of analysts' estimates, which called for earnings of $0.95 per share.

It wasn't all bad
But that doesn't mean there weren't bright spots. Remember, Oracle's software business -- which comprised nearly 79% of all revenue last quarter -- is in the midst of a transition away from upfront perpetual license payments. Instead, Oracle is moving toward a cloud-based subscription model, under which revenue is recognized over the life of those subscriptions. This may cause a temporary lull in top-line growth, but over the long-term should result in an even stronger, more predictable revenue stream.

And Oracle's already off to a great start. For perspective, its combined Software and Cloud revenue rose only 4% last quarter, to $8.9 billion. Within that, however, it saw adjusted platform- and software-as-a-service revenue grow an impressive 23%, to $327 million. In addition, Oracle's cloud infrastructure-as-a-service revenue grew 13% during the same period, to $128 million. All told, that means Oracle's cloud subscription businesses are collectively approaching a run rate of $2 billion per year.

These are fightin' words ...
In fact, according to Oracle CEO Larry Ellison, Oracle is now ahead of every other company in the SaaS market except Salesforce.com. And in IaaS, he notes that Oracle is "larger and more profitable" than Rackspace. Then, after boasting that Oracle has the "most complete portfolio of modern SaaS and PaaS products in the industry," Ellison asserted, "We plan to increase our focus on the Cloud and become number one in both the SaaS and the PaaS businesses."

That's not to say Oracle's competitors will just roll over and let it easily steal market share. But as impressive as it stands today, Oracle's cloud-based revenue still represents just a small fraction of its overall base. Call me crazy, but when this $190 billion tech titan decides to really buckle down and hone its focus on growing its cloud offerings, I wouldn't want to be on the other side of the table.

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