Oracle (NYSE:ORCL) played a trick on investors yesterday, and in the short run has gotten away with it.
As Marketwatch noted, the company combined its cloud revenue with its new software revenue, coming up with a figure of $5.7 billion. Co-President Mark Hurd said its cloud revenue has a "$1 billion run rate," but the other co-president, Safra Catz, admitted cloud revenues only came to $225 million. All this was done to hide the company's real problem, falling hardware sales, because overall revenues were down 2%.
Oracle consists of three businesses, two of which are in deep trouble:
- A database software-and-applications business, which seems strong but is very threatened by the rise of cloud computing.
- A hardware business, acquired with Sun Microsystems, that is going nowhere fast.
- The cloud business, which Oracle wants everyone to see as a profit driver.
Here's the problem. Clouds save money -- that's one of the keys to the business. In order to increase total revenues through clouds, Oracle has to gain a bigger share than it's getting in its enterprise sector, which is clearly impossible. CEO Larry Ellison sort of acknowledged that during his conference call, pointing to a "technology transition" that not all companies succeed in making.
But that's spin. What Oracle is doing is squeezing its enterprise software customers as hard as it can, claiming it can move them seamlessly to the cloud, where it can squeeze them a little more. Investors are right to question how sustainable that is.
Bulls will point to the success of IBM (NYSE:IBM) in maintaining its mainframe monopoly, or Microsoft's (NASDAQ:MSFT) success in continuing to draw revenues for Windows. But the history of Oracle's big acquisition, Sun, argues for another path.
My own guess is that Oracle can continue looking good through this financial version of plastic surgery, but such surgery doesn't really slow the march of time. You may look like a pirate on the outside, but on the inside you've still got all the signs of age.
Disclosure: I am long IBM, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.