Oracle's cloud transition will require some patience, say analysts

Oracle's cloud business has a lot of positives, but what's unclear is how much patience it'll get as the company navigates a bevy of challenges.

Oracle's first quarter financial results delivered the expected: Software revenue that underwhelmed, turbulence on international sales and cloud growth that can't quite offset either.

But the company did set expectations for the fiscal year. All that did was stoke worries about the company. Analysts are worried about cloud discounting as well as a hard transition to a subscription model.

In many respects, Oracle executives did what they had to do, but there are worries ahead even about the transition from software licensing to a cloud model.

Here's a look at the big challenges highlighted in Oracle's first quarter.


Software- and platform-as-a-service revenue growth was projected to be about 50 percent in constant currency. Wedbush was projecting 58 percent growth for that cloud category and CEO Mark Hurd was talking growth as high as 60 percent a quarter ago.

The upshot from Wedbush analyst Steve Koenig:

We think the cumulative impact of Oracle's SaaS pricing promotions are taking their toll on this revenue line, and deployments are taking longer than expected; the good news is that it looks set to accelerate in the 2H as the promotions come to a close.

Oracle simply has more cloud competition. Unlike licensed software where SAP is the main rival, Oracle has to duel with multiple cloud providers. Here's a look at how Oracle's outlook vs. actual results have stacked up via JMP Securities.


Software isn't likely to deliver any real improvement and cloud only accounts for 7 percent of total revenue. In other words, it's going to take a while for cloud to offset software licensing declines.

Oracle's infrastructure as a service business slowed rapidly. Oracle only sees IaaS constant currency growth of 5 percent to 9 percent in the second quarter. The dynamics here are unclear, but Oracle can't compete with Amazon Web Services on pricing or scale. The other tidbit: Oracle customers may not need IaaS if they are buying SaaS.

International markets are a mess. Oracle CEO Safra Catz said:

There's no question that internationally there is quite a lot of chaos, to say the least. And the currency impact of countries that we have been doing very well is not helping. Even though my Latin America team is executing out of the park in constant currency, the devaluation of the different currencies is affecting my U.S. dollar results. Obviously, there is quite a lot going on in Europe in different parts, and both that and currency. I feel that Asia Pacific for us is actually stabilizing. China is not a big country for us, historically, so that's less of an issue for us directly. But the countries and businesses that are impacted by the China trade, like Australia, Canada, Brazil, those can be at risk.

All of those risks aside, analysts said that Oracle has all the building blocks for the cloud transition. The big issue will revolve around how long it takes Oracle to make the turn.