Oracle's (ORCL) makeover is progressing, but more bumps in the road may lie ahead.
The longtime database software leader is transitioning from selling on-premise, licensed software to "cloud computing" -- selling subscriptions to software delivered as a service via the internet.
Oracle late Thursday reported fiscal Q1 earnings and revenue that missed Wall Street estimates, though its cloud business beat the company's guidance.
"The transition to cloud at Oracle is accelerating, even though overall revenue growth has so far been anemic in constant currency," William Blair analyst Jason Ader said in a report. "The challenge for management is to deliver on its promises to get margins back up as cloud investments scale, while managing a hardware business facing significant secular challenges."
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The enterprise software provider said fiscal Q1 earnings per share minus items climbed 4% to 55 cents while revenue in the quarter ended Aug. 31 rose 2% to $8.6 billion. Analysts polled by Thomson Reuters had projected EPS of 58 cents and revenue of $8.7 billion.
Cloud revenue topped guidance. Oracle said SaaS (software-as-a-service) and PaaS (platform-as-a-service) revenue rose 77% from the year-earlier quarter, to $798 million.
Oracle forecast current quarter EPS in a range of 59 cents to 62 cents, below analysts' estimate of 65 cents. Oracle cited a higher tax rate and higher interest expense for the below consensus guidance.
Oracle said it expects fiscal Q2 revenue to be flat to up 3% in constant currency vs. estimates of 3% growth. Oracle projected that fiscal Q2 SaaS and PaaS revenue growth will be up 78% to 82%, above the street's estimate of 76%.
"We doubt there is another major software company so aggressively pursuing a cloud transition," John DiFucci, analyst at Jefferies, said in a report. "While we believe this will prove to be a positive over time, margins fell below 40% for the first time in six years. We believe this will mitigate as the cloud business matures."
Oracle shares fell 4.75% to 38.92 on the stock market today, closing below the 200-day average for the first time in six months.
While Microsoft (MSFT) and SAP (SAP) have been Oracle's biggest rivals, the cloud business puts Oracle into competition with Salesforce.com (CRM), Workday (WDAY) and others. To speed up its move into cloud computing, Oracle in July agreed to buy NetSuite (N) in an all-cash, $9.3 billion deal.
The Redwood City, Calif.-based company is expected to discuss its product strategy at next week's Oracle Open World, its annual customer and software developer event, and at its investor day on Sept. 22.
