Oracle's "Nothing Burger" Causes Heartburn for Investors

Shares of Oracle (ORCL +6.47%) tumbled 7% on June 20, after the tech giant followed up decent fourth-quarter numbers with soft sales guidance for the current quarter and a questionable shift in its cloud reporting methods. Oracle's revenue rose 3% annually to $11.3 billion, which beat estimates by $60 million. Its non-GAAP earnings rose 11% to $0.99 per share, clearing expectations by $0.05.

However, Oracle expects its revenue to rise just 1.9% to 2.9% on a constant currency basis for the current quarter, compared to expectations for 3.3% growth. But more importantly, Oracle stopped reporting its cloud revenues by SaaS (software as a service), IaaS (infrastructure as a service), and PaaS (platform as a service) categories.

Image source: Getty Images.

Instead, it replaced those categories with two new ones -- one with Cloud Services and License Support revenues, and the other with Cloud License and On-Premise License revenues. During the conference call, Jefferies analyst John DiFucci suggested that Oracle was possibly "obfuscating" cloud weakness with that change -- but co-CEO Mark Hurd called it a "nothing burger."

However, that decision, along with Oracle's soft guidance, raises several red flags about the overall growth of its cloud business. Let's discuss why Oracle's sudden change matters, and why this "nothing burger" could cause heartburn for investors.

Why Oracle's cloud growth matters

Oracle, like many other mature tech companies, invests in higher-growth cloud services to offset the slower growth of its legacy on-premise businesses. However, these cloud services -- bundled together under its Oracle Cloud banner -- all face tough competition from other major tech companies.

The core of its SaaS platform is the Fusion Cloud, which provides cloud-based human capital management, customer relationship management, enterprise resource planning, and enterprise performance management services. Its big competitors in this market include Microsoft (MSFT +1.62%), SAP, and Salesforce.

Oracle's IaaS/PaaS platform provides remote computing power to companies that don't want to use on-premise servers. It consists of a higher-growth IaaS unit and an older PaaS/IaaS hosting business with slower growth. These services primarily compete against Amazon's (AMZN +1.25%) Amazon Web Services (AWS) and Microsoft's (MSFT +1.62%) Azure -- the two leading IaaS/PaaS platforms in the world.

Image source: Getty Images.

Over the past several quarters, a troubling trend has emerged. Oracle's total cloud revenue growth was decelerating, with consistent declines in its SaaS revenues and uneven growth in its IaaS/PaaS revenues.

Cloud revenue growth. Data source: Oracle quarterly reports. YOY = year over year.

Going into the fourth quarter, investors have hoped those growth figures would stabilize. Instead, Oracle merely reported that its Cloud Services and License Support revenue rose 8% annually to $6.8 billion, and its Cloud License and On-Premise License revenue fell 5% to $2.5 billion. Hardware sales stayed flat at $1.1 billion, and Services revenue fell 1% to $883 million.

Oracle stated that what it once called "total cloud revenues" hit $1.7 billion -- which represents 21% year-over-year growth, but only 6% sequential growth. Hurd also noted that the company's Fusion ERP and HCM SaaS cloud applications suite revenues "grew over 50%" during the quarter.

Still, based on those figures, it's impossible to know how well Oracle fared against rivals like Microsoft and Amazon. We know that both rivals are posting very robust cloud services growth: Microsoft's commercial cloud revenues surged 58% annually to $6 billion last quarter, while Amazon's AWS revenue jumped 49% to $5.4 billion.

It's a "something burger"

Oracle claims that it changed the reporting method to reflect higher demand for more flexible licensing options from its shift toward a BYOL (bring your own license) model. That might be true, and it simplifies the way Oracle reports its sales, but it also obfuscates the underlying growth of its cloud services. If investors can't get a clearer view of that growth, Oracle's stock -- which fell nearly 10% this year -- could continue sliding.