Warren Buffett Joins the Crowd Struggling to Understand Oracle

(Bloomberg) -- Warren Buffett isn't the only investor to examine Oracle Corp. and declare he doesn't “understand the business.” Even Wall Street analysts who cover the world's second-largest software maker must read the tea leaves to discern how much progress Oracle has made in its long-stated goal to transition to a cloud-computing powerhouse.

Oracle, co-founded by Chairman Larry Ellison, releases limited breakdowns in its financial disclosures, meaning that investors don't get a clear picture of the company's effort to move its customers to the cloud -- software stored in Oracle data centers and accessed via the internet. That makes it difficult to understand what's happening within Oracle's $40 billion of annual revenue.

When Buffett's Berkshire Hathaway Inc. bought a $2.1 billion stake in the third quarter, it looked like validation for the database giant. But the optimism proved short-lived, and Buffett sold his stock just a quarter later.

“Larry Ellison has done a fantastic job with Oracle,'' Buffett said Monday in a CNBC interview. “I've followed from the standpoint of reading about it, but I felt like I didn't understand the business. Particularly after my experience with IBM, I don't think I understand exactly where the cloud is going.''

Buffett may understand a little more than he let on. He cited the success of the two market leaders in cloud computing, Amazon.com Inc. and Microsoft Corp., suggesting he knows where the momentum is heading. The question is, where is Oracle heading?

Jack Andrews, an analyst at Needham & Co., said that judging Oracle's cloud transition could be “murky'' because there aren't enough data points to fully interrogate how the cloud efforts are playing out.

“Oracle is a very large and complex company,'' Andrews said. “It's hard for us, peering at a few income statements, to understand the machinations of what's going on in the business. We don't have all of Oracle's business lines laid out nicely and neatly to track this stuff.''

It's true that every company chooses what specific metrics to disclose about its revenue sources, and every analyst seeks more granular details about business performance. Oracle became less transparent last year when it stopped breaking out some key cloud sales numbers. Oracle executives instead argued that investors should look at the company's total revenue growth to judge the success of its cloud efforts. Sales have largely stagnated since. Oracle shares were little changed Tuesday at $52.71 at 12:19 p.m. in New York.

Oracle didn't respond to requests for comment about its disclosure practices.

There are two important business divisions that act as bellwethers in judging Oracle's cloud success. The applications business, which includes programs to manage a corporate client's finances, customers and human resources. The second is database, the company's original market.

“Oracle has done a very good job of moving its applications business to the cloud,'' Andrews said. “We can see that in the numbers. In the bigger piece -- the crown jewel of database -- customer behavior is different and we just don't have enough proof points to understand how it's doing.''

Buffett's brief status as an Oracle investor suggested a broader discomfort with the enterprise technology industry, according to Steve Koenig, an analyst at Wedbush Securities Inc.

“Investing in a cloud story is just something that's not in his comfort zone to begin with,'' Koenig said.

The episode recalled Buffett's failed investment in IBM, which started with optimism and ended in disappointment. The parallels between International Business Machines Corp. and Oracle are clear: Both are massive, older technology companies that sell products to other businesses and have sought to move to cloud computing to keep up with faster-growing rivals.

Koenig said he thought that Oracle reduced the financial disclosures in its earnings statements last year, in part, because of its difficulty in transitioning its database business -- the key source of the company's profits -- to the cloud.

“Until they find a way to make themselves relevant to database customers in the cloud, you cannot say Oracle is successfully transitioning to the cloud,'' Koenig said.

--With assistance from Katherine Chiglinsky.

To contact the reporter on this story: Nico Grant in San Francisco at ngrant20@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Molly Schuetz

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