Oracle changed the way it reports revenue a day after announcing its annual results and analysts say there has been 'confusion' (ORCL)

  • Oracle lost $1 off its price target from at least one investor on Friday after changes to how the company reports revenues wrecked havoc with Wall Streets estimates.
  • The new standards, known as ASC 606, impact all public companies in the US. The current quarter will be Oracle's first earnings using the updated standards.
  • But analysts made their initial estimates based on Oracle's old reporting standards. It was like comparing apples and oranges. 
  • Oracle's revenue in 2018 was $457 million lower using ASC 606 standards than the company initially reported to investors using the old model.

Oracle has confused Wall Street. 

The enterprise tech giant recently restated its revenue for its most recent fiscal year and nearly a half billion seemingly vanished from the topline. 

The missing revenue is not really lost, it's just a result of new accounting rules that Oracle implemented. But the change appears to have caused confusion on Wall Street, wreaking havoc on the analyst research models that help shape investors' expectations for Oracle's business. 

Cowen analyst J. Derrick Wood chopped $1 off of his price target for Oracle and lowered his estimates on Friday. He expects others on Wall Street to "follow suit."

Because of new guidelines, known as ASC 606, Oracle's restated revenue for fiscal year 2018 were lower by $457 million, around 1% down from what it reported using the old standards. Oracle's EPS was also lower by $0.08, or 2.5%.

Oracle announced its results on June 19, but then restated its revenue on June 20 using the new 606 accounting rules.

ASC 606 primarily affects Oracle's ability to recognize revenue for licenses over a long period of time. Oracle now has to record the revenue for on-premise software licenses all at once, during the quarter that the software was actually delivered to the customer. This is even the case if a company pays off its license in installments. 

The total amount of revenue Oracle sees doesn't change, So while the changes impact Oracle's run rate, they won't have much of an impact on its overall cash flow, Wood told Business Insider. 

Evercore analyst Kirk Materne said "there were no major surprises" in the restated figures, but also tweaked his estimates downward for fiscal year 2019 to reflect the new numbers. Evercore maintained it's target price of $53. 

The new standards can impact revenues by millions of dollars

ASC 606 went into effect for all companies in the US for the fiscal year starting after December 15, 2017. Oracle will use ASC 606 for all quarters moving forward, but it wasn't legally required to issue these numbers during its most recent earnings.

The new standards change how companies report on-going and subscription revenues. This caused a small problem for investors, who base their revenue and earnings estimates, as well as price targets, on models that assume that things stay the same from quarter-to-quarter. 

Oracle isn't the only company to lose or gain millions in revenue thanks to the new account standard. 

At Tesla, for example, the change added $299 million onto its sales revenue in the first quarter. It looks good, but it's purely an accounting change — it doesn't actually say anything about the company's growth and in theory shouldn't make the company any more valuable.

Oracle's stock remained fairly stable on Friday, though it has yet to recover from a big self-off caused by sweeping changes to the way it reports out cloud revenue. The stock fell 7.5% following earnings on June 19, and remains down around 5.3% from where it opened before earnings. 

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SEE ALSO: Oracle shares sink 7% as Wall Street freaks out over a surprise decision not to share specific cloud numbers

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