Oracle Corp. (NYSE:ORCL) is going through a necessary but painful business transformation, one that is fairly common in the technology sector nowadays. Many companies, including Oracle, are slowly moving away from hardware and shifting their emphasis toward software and services.
This is a costly endeavor, and earnings bear the brunt of these turnarounds. This also takes time, since huge companies like Oracle can't just turn on a dime. Nowhere is this more evident than in Oracle's quarterly reports over the past year.
You may have heard that the cloud is the next revolution within the technology industry. That's likely true, and some companies like Oracle seem to be caught off guard. Oracle is busily trying to catch up by making considerable investments and pursuing large acquisitions to make sure it doesn't fall behind its competitors. For example, Oracle is buying MICROS Systems (UNKNOWN:MCRS.DL) for $5.3 billion.
Establishing a leadership position in software and services, particularly in the cloud, is where Oracle is hoping its pursuit of MICROS Systems pays off. MICROS offers software for a range of industries, including retail, restaurants, and hotels. MICROS' services are used in everything from placing orders to making reservations.
Almost touching the cloud
Oracle is a company in transition. It's undergoing a strategic shift in its core business, which should pave the way for a brighter future. That means the present will be challenging, and the last several quarters have been dragged down by lackluster growth and higher expenses.
These same conditions persisted in the most recent quarter. Total revenue increased just 3% in the fourth quarter, while GAAP earnings per share were flat. Revenue and earnings per share both missed estimates, and shares of Oracle slumped 5% after announcing its quarterly results. Not surprisingly, the main culprit was hardware, which posted just 2% growth last year.
However, despite the disappointing numbers, Oracle management was quick to point out progress in its key initiatives. For example, its cloud subscriptions are approaching a run rate of $2 billion per year.
Since Oracle was late to the cloud party, it's using its financial girth as a $178 billion company by market capitalization to try to instantly buy growth. MICROS fits the bill, since revenue increased 10% in the most recent quarter and 7% over the past three quarters.
Oracle's over-arching strategy is to boost its presence in software as a service, or SaaS, and platform as a service, or PaaS. There's good reason for this, since even though Oracle's earnings report underwhelmed on the surface, certain segments showed strength. Cloud PaaS and SaaS revenue jumped 25% last quarter to $322 million, far outpacing Oracle's other segments.
Oracle announced after reporting earnings that it is now the second-largest SaaS company in the world by revenue. Its position will be enhanced further with the buyout of MICROS. Oracle is outperforming in these areas, which represent the future of its growth strategy.
The Foolish takeaway
Oracle's disappointing quarterly results, in which both revenue and profit missed analyst estimates, were a continuation of a disturbing trend. There isn't a lot of evidence that its turnaround is materializing, because the company is still weighed down by a sluggish hardware unit.
Under the surface, however, there are real signs of progress. Oracle is steadily building out its software and services businesses, and there's a chance it can soon establish a leadership position. If it can finalize its takeover of MICROS Systems, that will help speed up the process.
Still, its progress wasn't enough to silence the critics. Oracle handed in a weak quarterly report, and it's looking as though investors are losing patience. Patience is exactly what you will need to buy Oracle at this point.
Bob Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.