Oracle numbers spook Wall Street as BYOL slows cloud revenue growth

SUMMARY:

Oracle’s Bring Your Own License offering is popular with customers, according to Larry Ellison, but it comes at a price in terms of cloud revenue growth.

oracle open world 2016
Larry Ellison

Mixed fortunes for Oracle yesterday as its cloud revenue growth rate slowed for the third successive quarter.

The firm turned in total cloud revenue of $1.56 billion, up 32% year-on-year. But that was down on 44% last quarter and 51% in the first quarter, as well as 58% in the final quarter of the previous fiscal year.

And the forecast for the current quarter of between 19% and 23% growth gave Wall Street the chills.

Of the total cloud revenue, $1.15 billion came from SaaS, up 33% year-on-year, while PaaS and IaaS grew 28% to account for $465 million in revenue.

On-premise revenue of $6.42 billion accounted for two-thirds (66%) of Oracle’s total revenue in the third quarter, up 4% year-on-year. New software licenses turned in $1.39 billion, down 1.8% year-on-year.

The cloud growth slowdown may explain the focus on the post earnings conference call on Oracle’s Bring Your Own License (BYOL) offering – which allows clients to use their on-premise license in the cloud, but which some analysts were concerned is stalling cloud adoption.

Chief Technology Officer Larry Ellison appeared to concede that there was some truth in this thesis:

There is no doubt that BYOL, when you’re bringing your license to the cloud, encourages your customers to continue license purchases, buy more database licenses, continue to buy database options, like multi-tenancy, to buy databases, database options like Real Application Clustering and the like.

Our customers love the idea that once they make an investment in the license, they can use that license on premise or in the cloud, you can deploy it either place. So where historically people have thought of our license business as our traditional on premise business, in fact that is simply not the case. In fact, our licenses are being deployed in our cloud.

They’re not just being deployed in our cloud – our licenses are being deployed in the Salesforce and the SAP cloud and the Microsoft cloud, in the Amazon cloud. So again, our license business is not our legacy business, our license technology business not a legacy business. These licenses are going to be used and are being used more and more in modern cloud, not just the Oracle cloud but our competitors clouds as well.

But while he pitched the positives resulting from BYOL, he did admit it does have an impact on cloud revenues:

With BYOL, when someone brings their database to the cloud, some of that revenue goes into license and some of that revenue goes into cloud. Without BYOL, as we didn’t have BYOL, and an Oracle customer went to the cloud, 100% of revenue [went] to the cloud. So there’s no question BYOL has lowered our cloud revenue and increased our license revenue.

Mixed picture

CEO Mark Hurd argued that it’s actually a mixed picture in terms of cloud growth numbers:

We have some very high growth rate SaaS businesses like ERP and HCM, and we have some that we developed organically and we have some slower growth rate SaaS businesses that we’ve acquired many years ago. As the mix changes, you see all the growth is coming from Fusion ERP, Fusion HCM, NetSuite.

As you see this shift to the higher growth rate SaaS services, I expect as our mix changes Fusion ERP, Fusion HCM and that’s where it became a larger percentage of the total, again to growth mark, the math just says the growth rate should accelerate because of the mix change.

Also the renewal rates, the renewal rates are much higher in the high growth SaaS services. So Fusion ERP, Fusion HCM, NetSuite have much higher renewal rates than we have in some of the older acquired SaaS products. So the combination of faster sales and higher renewal rates should dramatically increase our growth rate in our SaaS business.

Hurd also stated that only 15% of apps customers have made the move to the cloud, with 85% still ahead. That 15% comment was qualified by his co-CEO Safra Catz who added that the 15% has just started on the  cloud transition:

This is not 15% have moved all of their apps to the cloud, they just started so [there] is [a] ton of room here.

Ellison argued that the situation had its own complexities and subtleties:

In terms [of] if you looked at core – meaning I have core E-Business Suite solutions and I replaced it with a cloud financials SaaS application -.that percent of our user base [which] has moved is below single digits. The less-than-15% number we put out is the percent of our user base that has some cloud applications that they are now using.

The percent of our user base that is in our pipeline now is getting to be fairly [extensive]. It’s multiple 10% of our user base. When we convert a traditional on premise application to SaaS, we typically get 3 times the revenue. The bulk of our bookings, the bulk of our revenue today, is not from our user base.

All that said, Oracle itself has been eating its own dog food, added Ellison:

One of the biggest users we have has now just migrated to the cloud and that would be us, Oracle. We have migrated the entire company to SaaS. That’s an important point because we’ve moved really the suite of ERP capabilities that we had traditionally on premise, now to cloud.

My take

A $6.9 billion tax charge meant Oracle made a net loss of $4 billion, but that wasn’t the reason the share price fell 8% yesterday. It was Wall Street nerves about the cloud growth numbers and confusion about the role BYOL plays. That’s essentially a messaging issue for Oracle to deal with and one that will need to be addressed in future quarters as this isn’t a problem that’s going to go away otherwise. Explaining cloud economics to Wall Street investors has been an ongoing challenge for many vendors. It doesn’t seem to be getting any easier.

Image credit - Oracle

Disclosure - At time of writing Oracle is a premier partner of diginomica.

    1. Martin Banks says:

      Can’t help feeling that one of the problems here is that Wall Street still cannot manage to get its head round the cloud and what it means for businesses like Oracle. It is why companies like Tibco pull themselves from the public stock markets. Having your stock price bombed by people that don’t understand the inevitable hit that revenue numbers will take during the transition from the traditional front-loaded licence selling model to the drip feed of an annuity revenue model must be quite galling.

      I can’t see Larry buying Oracle out of the market (though Michael dell managed it with Dell a couple of years back), but stock analysts are going to have to learn about this change if they are to maintain their credibility. The bigger and older the traditional applications software business is (and there are few if any that are bigger or longer lasting than Oracle) the harder and rockier the transition road will be.

    2. Shouldn’t audited customer driven growth be the metric that matters?

      Irony of top enterprise execs having to explain cloud revenue. The same Wall Street is fascinated after decentralisation growth (such as Ripple IPO) and Edge computing (on-prem).

      Large complex business systems such as Oracle and SAP should span a hybrid of online + onprem. The clever stuff is making both interoperate robustly and security. Meeting customer needs, not Wall Street’s fictional cloud story.

    Leave a Reply

    Your email address will not be published. Required fields are marked *