A $20 billion business within 5 years - the cloud ERP worldview according to Larry Ellison

Stuart Lauchlan Profile picture for user slauchlan December 10, 2021 Audio mode
Summary:
Oracle CTO Larry Ellison was on vintage form as he pitched his assessment of the cloud ERP market.

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A $20 billion cloud ERP business within five years. That’s the bullish prediction from Oracle CTO Larry Ellison as he contemplates the ERP market landscape as a whole and Oracle’s position within it.

The firm just turned in Q2 revenue of $10.36 billion, up 6% year-on-year. Net income of $2.44 billion for the comparable period last year turned into a loss of $1.247 billion, because of a one-time $4.7 billion payment stemming from a 10-year-old dispute surrounding former co-CEO Mark Hurd’s employment. Cloud services and licence support revenue was up 6% year-on-year to $7.55 billion, while cloud licence and on premises licence revenue was up 13% to $1.24 billion. Hardware sales fell 9% to $767 million, while services revenue rose 7%, to $802 million.

But it was the current and future state of the ERP market that dominated Ellison’s call with analysts last night. It’s a work in progress, he said, noting that the likes of Microsoft moved their entire Office installed base into the cloud to grow their cloud business. The same option was not open to Oracle, he said:

We had 7,500 customers in Oracle on-premise, their ERP made up of E-Business Suite, PeopleSoft and JD Edwards. Only 1,000 of those 7,500 have moved to Fusion Cloud ERP. Now we have not lost any of these customers to competitors. We expect all the remaining 6,500 to move to Fusion ERP, but it hasn't happened yet. That's all upside. That's all upside.

In terms of Oracle’s cloud ERP business today, Ellison pointed to a “round number” of $5 billion revenue from 8,500 Fusion customers:

Remember only 1,000 of those 8,500 came from our old on-premise business - 6,500, plenty to come. So 7,500 of these 8,500 were not running Oracle ERP before we came out with our cloud product. Those are all new customers. Add to that the 28,000 new NetSuite customers. So Oracle has a total of 35,500 cloud ERP customers that are new to Oracle. Only 1,000 of our on-premise installed base has migrated so far. Let me repeat that - 35,500 net new cloud ERP customers we got in the last few years. Only 1,000 from our installed base that's going to be coming to us later on.

Adding up

So where does that $20 billion prediction come from? Ellison argues that it won’t just be from Oracle on prem customers migrating but also from other vendors on prem businesses:

Whether it's a small company like Infor or a large company like SAP or a variety of other companies, the vast majority of our cloud ERP customers are not coming from our installed base, they are coming from someone else's installed base. Eighty-five percent of our current [customers] that we have are from someone else's installed base.

Oracle has two main rivals, he went on, citing familiar foes in the form of SAP and Workday. The former, he attested, didn’t build “a true cloud product”:

That's the same old 35-year-old software they've been selling forever. Their goal is simply to hold on to their installed base, but they are losing customers to us.

Workday does have a cloud product, he conceded, but alleged that very few are live, going on to claim that Oracle is beating Workday 98% of the time in bids.

Oracle is, he attested, beginning to “roll up entire industries” with Fusion ERP, noting that he had previously argued that the two largest sectors would be banking and healthcare:

Some of our live banking and financial service customers include JPMorgan, Bank of America, Bank of New York Mellon, HSBC, State Street, NatWest, Santander, Macquarie. I can go on and on and on with a long list of banks all over the world. But also we have insurance customers - USAA, Nationwide, AAA and a lot more…We won Barclays. That was another big bank that we won. First Bank. In insurance, we won Ameritas, MoneyGram. And we had some major go-lives, huge go-lives, at MetLife, Blackstone, and Assurant. We're doing very well in financial services and specifically banking.

As for healthcare, customers are more centered on the US market, where customers include Kaiser, Cleveland Clinic and Providence St, with recent additions of Mayo Clinic, Highmark Health, Syneos Health and PPD.

Ellison also pointed to the logistics sector as another sweet spot:

We've become very, very strong with logistics customers. FedEx was a key win from us, a takeaway from SAP. UPS. We have UPS, DHL, FedEx, DP World, TTS. I can go on and on. We have most of the big logistics companies around the world. A lot of our companies aren't through rolling out Oracle Fusion ERP, but FedEx, for example, is now live in 98 countries.

Confession

Having said all that, the never knowingly under sold CTO went a step further:

I have a confession to make. I don't believe it. We are not on our way to building a $20 billion cloud ERP business in five years. I think it's going to be a lot bigger than that.

Why? It all comes back to a question, he said:

What does a B2B procurement transaction look like? In other words, how does it work when one Oracle Cloud ERP system is talking to another Oracle Cloud ERP system and placing an order? We are working in concert with our banking and logistics partners to originate purchase financing, products shipped, delivery tracking, invoicing, and payments right inside the two transacting Oracle Cloud ERP procurement system. Oracle Cloud ERP will soon bring an entirely new level of automation to B2B commerce, one that very much resembles the ease of doing business and efficiency of B2C e-commerce. This new ERP automation system, all these new capabilities, will dramatically simplify our customers' procurement and supply chain processes.

My take

A conference call that was vintage Ellison, pitching a confident worldview, peppered with bold claims and topped off with sabre rattling at rivals. It was quite like old times. Away from that, it was a strong quarter that kept  Wall Street happy, notable for breaking through the $10 billion run rate, with cloud revenue driving growth.

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