Oracle's Q2 revenue comes up short dragged by Cerner business, slower cloud growth

Oracle's second-quarter revenue fell short of analysts' expectations, dragged down by its Cerner business and slowing cloud growth.

The software giant's total revenue for the quarter grew 4%, but would have increased 6% excluding the contribution of the former Cerner, according to the company's second-quarter financial results. Oracle's Q2 revenue growth slowed from 9% during its fiscal first quarter.

The company acquired health IT company Cerner in a $28 billion deal in June 2022 to push deeper into the healthcare market and help boost its cloud business.

Oracle's total revenue came in at $12.9 billion for the quarter that ended Nov. 30. Analysts had expected quarterly revenue of $13.05 billion, CNBC reported.

Total cloud revenue, excluding Cerner, was $4.1 billion, up 25%. Including the Cerner business, total cloud revenue was up 24% at $4.8 billion.

The company did not separately break out revenue for the Cerner EHR business.

Adjusted earnings for the quarter rose 11% year-on-year to $1.34 a share, beating Wall Street forecasts of $1.32.

The company's near-term forecast also was weaker than Wall Street analysts expected. Oracle projected adjusted net income for the fiscal third quarter of $1.35 to $1.39 per share and 6% to 8% revenue growth. Total revenues, excluding Cerner, are expected to grow from 8% to 10%. Total cloud revenue, excluding Cerner, is expected to grow from 26% to 28%. 

Analysts polled by LSEG had predicted $1.37 in adjusted earnings per share and $13.34 billion in revenue, which implies 7.6% revenue growth, CNBC reported.

Oracle shares dropped 12% on Tuesday as investors were disappointed about the company's two straight quarters of lower-than-expected cloud revenue.

During the company's Q2 earnings call, CEO Safra Catz said the former Cerner business, now called Oracle Health, produced “a drag on Oracle growth.”

"For the full fiscal year, Cerner will be sort of negative one to two points, but that will be it. It'll end this fiscal year. And from then on, it will be a gross story," she told investors during the earnings call.

Catz said the company was working to “drive Cerner profitability to Oracle standards.”

The company is in the process of transitioning Cerner to the cloud and is upgrading and modernizing Millennium "a piece at a time" to go after a bigger piece of the healthcare ecosystem, Larry Ellison, Oracle chairman and chief technology officer, told investors.

Half of Cerner Millennium customers will move to Oracle Cloud Infrastructure (OCI) by February. 

"Different pieces will be available starting next year. Certain customers will be getting new features and capabilities as Millennium moves to OCI," Ellison told investors during the call.

Oracle has been working to catch up to other cloud vendors such as Amazon Web Services, Google and Microsoft. OCI is the company's rival to AWS and Microsoft Azure.

Ellison said he expected OCI's growth rate to be "over 50%" for a few years.

The company also is working to "rewrite" Cerner's health and data intelligence platform, Cerner HealtheIntent

"We've completely rewritten it pretty much; we're in the process. We will finish next calendar year. But it is largely rewritten and available right now. That's for population-scale public health management," Ellison said.

"Remember, during COVID, when we didn't know, New York, we thought they were running out of hospital rooms, but they really weren't, but no one knew because no one kept track of our inventory of hospital rooms. There's no national view. No one knew how many people contracted COVID yesterday. We didn't have that national view. We have that national view," he said during the earnings call.

He added, "It is fully SaaS, and it is available right now. Some of the Cerner pieces are coming online. Other Cerner pieces are moving more gradually, but they're all going into OCI, and they're all very quickly moving from a license basis to a subscription basis."

A year ago, when Oracle, known for its database software, announced it planned to acquire Cerner, Ellison touted plans to modernize Cerner's Millennium EHR platform with updated features such as voice interface, more telehealth capabilities and disease-specific AI models.

Oracle is using its tech muscle to add new capabilities to the Millennium EHR such as new products for pharmaceutical companies and additional products for hospitals to keep track of inventory and manage their workforce, Ellison said.

"Really, what we think of is our health division in Oracle has products for the entire healthcare ecosystems: payers, including governments, including insurance companies; providers, including ambulatory clinics and hospitals; pharmaceutical companies; research companies; and public health departments in national governments and state governments," he said. "We have products for the entire healthcare ecosystem, which is a much larger footprint than Cerner ever had. So, we are going after a much larger market than Cerner was."

Oracle expects Cerner to be a "growth story," he noted. 

Ellison and Catz said they are seeing accelerated demand for Oracle's cloud and generative AI technologies. 

"We expect OCI to just grow astronomically, frankly," Catz said.

"The demand for Oracle Cloud Infrastructure and generative AI is consistently increasing quarter after quarter. Oracle's total remaining performance obligations, or RPO, has now reached $65 billion, slightly more than our annual revenue. In response to this sharply increasing demand, Oracle is in the process of expanding 66 of our existing cloud data centers and building 100 new cloud data centers," Ellison told investors.

He said Oracle Health is using generative AI in its Cerner EHR platform.

"Our new telecommunication module summarizes a consultation between a doctor and a patient and writes the doctor's notes for the doctor automatically," he said.

"We now have our large language model generating the summary without a scribe that the doctor can edit in a couple of minutes. It's actually succeeded in doing one of the very hardest tasks we assigned it," he noted. 

"We're seeing a huge uptake of this technology, everything from complex healthcare and health science to more mundane tasks that you find throughout an enterprise but still very important in making your employees and your company more efficient and more competitive," Ellison said.

With deploying AI in healthcare, Oracle's monetization is at the "highest end of the value chain," Ellison said.

"We actually supply the application with our partner that does cancer diagnosis, that does the doctor's notes, that does the doctor's orders, that actually automatically generates the prescriptions, that reminds the patient to take the prescription so you get compliance," he said. "That's the high-value end of AI, when you're preventing someone from being rehospitalized, which has a huge cost in terms of human suffering and money."