MarketWatch First Take: Oracle cloud growth slows, and — Surprise! — it stops giving cloud numbers

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After a few quarters of disappointing cloud revenue growth, Oracle Corp. on Tuesday surprisingly stopped breaking out its much touted cloud business.

The move should lead some investors to fear Oracle ORCL, -0.54%  is obfuscating the performance of its once-hot growth business, after loud concerns about disappointing cloud growth. After an initial pop in after-hours trading on better-than-expected fiscal fourth-quarter results, shares of Oracle fell nearly 4% to about $44.55 Tuesday afternoon. That decline could continue a slide that has seen Oracle fall 2.1% this year, while the Dow Jones Industrial Average DJIA, -1.15%  after Tuesday’s tumble, is up 1.1%.

Oracle has been breaking out cloud revenue very specifically, with three different types of businesses — software-as-a-service, platform-as-a-service and infrastructure-as-a-service — reported separately and as a group. With its new reporting structure revealed Tuesday — less than two years after Oracle last changed how it reported numbers — not even the total number was included in official statements, though co-Chief Executive Safra Catz did give an overall number on the company’s conference call.

In that call, John DiFucci, an analyst with Jefferies & Co., said he understood the rationale behind Oracle’s change in reporting, but asked “how do you get investors comfortable that this also is not obfuscating any cloud weakness?”

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“There is no hiding. The cloud number is $1.7 billion,” Catz said. “We are right where we said we would be…Cloud billings strong. Nice and strong. You can hear that. You can hear it from what we’re talking about.”

Analysts had been looking for Oracle to report $1.69 billion in total cloud revenue, according to FactSet, expectations that have diminished since Oracle’s cloud growth started slowing down last year. That reflects year-over-year growth of 21.4%, compared with growth of 58% in the fiscal fourth quarter of 2017, showing further slowing compared with rivals such as Amazon.com Inc.’s AMZN, +0.64%  AWS, which grew 49% in the most recent quarter.

In its news release, Oracle instead reported combined cloud services and license support revenue of $6.8 billion in one category, an increase of 8%, and $2.5 billion in cloud license and on-premises licenses in another revenue category, a drop of 5%. Oracle said it is combining cloud and its legacy software businesses in its financial statements because customers want more flexible licensing options. As customers transition more software and data from legacy systems on-site to the cloud, Oracle now offers them a so-called “bring your own license,” or BYOL, option.

“We want to explain to you and make sure you understand…that our customers are both buying licenses and using licenses they have, which are currently being recorded as on-premise support,” Catz said. “They’re using those, in fact, in the cloud, and that’s something that’s, of course, what they were designed for, frankly, and what we’re very excited about.”

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DiFucci, who has a buy rating on Oracle, said in a telephone interview that from a high level, it makes sense what Oracle is doing, because the company has some very large customers who have hybrid systems, partly in the cloud and partly on-premises.

But with Oracle’s cloud revenue clearly decelerating, Oracle doesn’t have a big reason to focus on that business anymore.

“I would say that Oracle is trying to shift the narrative away from the cloud,” said Patrick Walravens, an analyst with JMP Securities LLC, in an email. “In the end though, it doesn’t really matter that much what bucket you put the revenue in…the real question is, how much growth is there in the entire business? The answer at the moment is not much. One percent growth in constant currency in total revenue in Q4.”

While Oracle may be able to justify yet another change to reporting as it incorporates new accounting standards, appearances are important. This change appears to be a way to hide numbers that have been disappointing to investors and weighed on the company’s stock, which should make any investor very wary.

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