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Cloud Software Outlook to Dominate Oracle's Q4 Results

Is the cloud starting to float at last for Oracle?

Asa Mathat

When the business software giant Oracle reports its fourth-quarter results today, expect a lot of attention to focus on its ongoing shift from selling software in a traditional on-premise way and toward subscriptions to its software in the cloud.

Analysts surveyed by Thomson Reuters are calling for Oracle to post earnings per share of 87 cents on revenue of $10.95 billion in what is typically the company’s strongest quarter. They also expect Oracle to forecast 61 cents on $8.62 billion in its first fiscal quarter ending in August.

Cloud software economics being what they are, a strong quarter for Oracle’s cloud business might present a short-term pain in favor of long-term gain because of the way subscription revenue is recognized. Under the old model for selling software, 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. The pain is less revenue up front — indeed it hurt Oracle’s results at this time last year — in exchange for better cash flow and billings down the road.

RBC Capital Markets analyst Ross MacMillan argued in a note to clients on June 11 that the traditional view of Oracle’s results are “becoming a lagging indicator for the business” and that cloud bookings are the important metric to watch. He said he expects billings — the sum of Oracle’s contracts expected to bring payments in the future — to be the important metric to watch as the cloud business grows. Billings are expected to fall by about 3 percent in the quarter but start to grow as Oracle moves into its 2016 fiscal year.

MacMillan estimates that Oracle will post cloud software revenue of about $405 million. At less than 4 percent of sales that doesn’t seem like much, but that would amount to growth of 24 percent compared to the 8 percent year-on-year decline he expects for Oracle’s traditional software business.

There’s another metric to watch, and that’s the currency effect: As a U.S.-based company that does a lot of business overseas, Oracle gets pinched when its customers pay it in non-U.S. currencies like the euro and the Japanese yen when the dollar is strong. When Oracle last reported results, in March, it said currency effects hurt its per-share earnings by six cents. MacMillan says to expect Oracle to absorb an eight-cent hit, give or take, this time around.

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