Shares of software giant Oracle are having their worst trading day all year, falling more than five percent after the company reported results for its fiscal fourth quarter that missed expectations.
At noon New York time, Oracle shares were down by $2.19 to $40.32. Despite today’s drop, the shares have risen by about 34 percent since this time a year ago.
Oracle executives took pains to spin the miss as the result of a transition in the type of software the company sells. Oracle long sold software that runs on the customer’s own hardware, or “on premise.” It has been converting its software to run in the cloud and charge customers for its use on a subscription basis, which is more in line with how rivals like Saleforce.com and Workday operate.
The company says its cloud software now accounts for about $2 billion a year in annual revenue, which would make it the second-largest provider of software-as-a-service after Salesforce.
The shift is hurting Oracle because of the way subscription revenue is recognized. Under the old model, known as a perpetual license, Oracle booked the full price of software sold as revenue all at once. With cloud software, revenue is booked over the time of the subscription period.
Here’s a simple example: Let’s say Oracle once sold you software worth $300, and you paid up front. But then you switch to a cloud product with a three-year subscription. That $300 would be split into monthly increments of $8.33.
During a conference call with analysts, CEO Larry Ellison tried to explain the difference: “We get about the same amount of money from a subscription after three years as we get from a license,” he said. But some subscriptions can last as long as 20 years, he said. “So we are going to recognize the revenue more slowly. … That’s okay, because in the long term we make much, much more money. And we can effectively compete against this whole new array of competitors like Salesforce and Workday.”
Investors may find their patience tested until that happens. While the subscription model makes future revenue predictable, the shift is hurting Oracle’s older business in the short term. Out of total sales in the quarter of $11.3 billion, only four percent of Oracle’s revenue, about $450 million, came from cloud software sales. And while that’s an increase of nearly 22 percent from the same period last year, it’s not going to move the needle on Oracle’s results.
By comparison, sales of new software licenses, long the most closely watched indicator of the health of Oracle’s business, were nearly $3.77 billion or about 33 percent of sales, and unchanged from the year-ago period.
One problem, wrote analyst Brent Thill of UBS in a note to clients today, is that many of Oracle’s customers have been running its software for a long time. They tend to be more conservative and less likely to embrace the new cloud model. “Oracle’s revenue profile is likely to stay a hybrid mix of perpetual license and cloud subs for some time as some customers with large legacy investments prefer on-premise model.”
Meanwhile, Oracle continues to look to acquisitions to spur growth. It announced today that it will buy LiveLook, a maker of collaboration software. Terms were not disclosed. Oracle is also said to be in exclusive talks to acquire Micros Systems, a maker of payment systems software for hotels and restaurants, at a price of about $5 billion. News of the talks was first reported by Bloomberg on Tuesday.
Oracle has been an aggressive acquirer of cloud software companies in recent years. Its most recent deal in that area was for Responsys, a maker of cloud marketing software for which it paid about $1.5 billion in December.