Oracle's big software change is a headache, and Wall Street doesn't know what to make of it

Oracle shares lost 4.8% on Thursday after the company reported a disappointing fourth quarter on Wednesday.

The fourth quarter is typically the company's strongest as salespeople push to close deals to make quotas, though Oracle missed on both profit and revenue.

With this report, Oracle has now missed profit expectations for four of the last six quarters, including its last two fourth quarters. Revenue has been a miss in three of the last six quarters, too, according to Street Insider.

This a worrying trend given that Oracle CEO Safra Catz has characterized this quarter in the past as "Mardi Gras for Oracle from a license revenue perspective."

This time around, Oracle management blamed the strong dollar and foreign exchange (FX) adjustments for the overall revenue miss, but that wasn't what caused the sell off. Revenues from new software licenses, Oracle's bread-and-butter business, were down 10% even without the unfavorable currency adjustments.

Catz said this was due to customers moving to cloud versions of Oracle's software instead of software that is licensed and installed in a customer's data center (known as "on premises" software).

Oracle executive chairman Larry Ellison also explained that Oracle expects to earn three-times more revenue from each cloud contract, at roughly the same high 45%+ margins, as it does selling software the old-fashioned way.

However, when a customer moves to the cloud, it creates an accounting weirdness. Oracle can't recognize the revenue right away like it would for a regular software deal.

The company instead must recognize revenue over the length of the contract as customers are billed. That can make a company look like its losing revenue, even though it could be making more money from that customer over time.

Oracle's cloud accounted for 4% of its fourth quarter revenue. At end of Oracle's fiscal 2015, Oracle's cloud was on track to be a $2.3 billion business, Oracle CEO Mark Hurd said, compared to total 2015 revenue of $38.2 billion.

Plus, Hurd also insisted that much the cloud was being bought by brand new customers that have never used Oracle before.

Hurd said:

Last quarter I think I said that 82% of our cloud SaaS deals were actually not Oracle customers of an application when they acquired or contracted for a SaaS application. This quarter it was over 60. So these are - this is not just the conversion of Oracle customers, Oracle application customers to SaaS, this is a lot of greenfield new market share for Oracle as well.

When it comes to Wall Street, however, some analysts were concerned while others were excited.

Daniel Ives at FBR and Co., who rates the stock an outperform, called it a "a head-scratching quarter" and wrote:

Street expectations should now be 'very conservative' for FY16, and we think that Oracle has a window of opportunity to build back investor credibility in the coming quarters if it finally delivers on its holistic cloud vision and top-line growth recovery story.

Deutsche Bank's Karl Keirstead, who rates the stock a hold, writes:

In our view the two key questions from ORCL's 4QF15 print are 1) whether the mix shift from on-premise license revs [revenues] to cloud-hosted subscription revs [revenues] can fully explain the 10% c/c [constant currency] decline in new license sales (largest decline since the Aug 2009 qtr) and ... 2) when the pressure on margins and EPS will stabilize.

Kash Rangan at Bank of America, who rates the stock a buy, wrote that the sell-off of Oracle is "overdone and presents an opportunity."

Rangan says he's making a "leap of faith" that Oracle's management really will collect three times more revenue over time on cloud customers.

Barclays Raimo Lenschow was also upbeat about Oracle's future, writing:

The core license business this quarter was lighter than expected, falling short of consensus by ~8%. We view this as largely attributable to a higher shift to the cloud, specifically in Europe. In the long run, we expect the company to recognize more value in the cloud focused model.

Oracle isn't the only huge IT vendor to go through this conversion to cloud computing.

Microsoft is also making the shift, as is SAP, and just about every other big vendor that sells software to businesses.

Oracle knows it needs its cloud to succeed.

Up and coming technologies like MongoDB, Cassandra, and Hadoop offer ways to store large amounts of data more affordably than old-school databases like Oracle and they've seen their popularity surge of late.

The underlying worry from investors is that those alternatives are the real reason why Oracle's new licenses were down 10%.