Cloud, cloud, cloud for Oracle, but Wall Street's unimpressed

Things ain’t what they used to be.

Where once just getting Oracle execs to utter the c-word was a task in itself, now as President Mark Hurd put it during the firm’s third quarter results conference call:

“It’s cloud, cloud, cloud!”

Maybe so - and more on that below - but the numbers reported by Oracle yesterday got a somewhat frosty reception from Wall Street with the share price down 5% over night, although this year’s third quarter was an improvement on the year ago equivalent.

Some topline numbers of note:

• Total revenue for the quarter was $9.3 billion, up 4% year on year
• Non-GAAP operating income grew $188 million to $4.4 billion
• Total software revenues were nearly $7 billion, up 6% from last year.
• New software licence and cloud subscription revenue was up 4% to $2.4 billion
• Software updates and product support revenues drove nearly half the total company revenue at $4.6 billion, up 7% from last year.
• Cloud subscriptions were 292 million up 24% from last year.
• Revenues for all portfolio of Fusion including financials, supply chain, HCM and customer experience grew triple digits.
• Hardware system product revenue was $725 million, up 10% from last year.
• Hardware gross margin was down about 2 points.

So back to the cloud, cloud, cloud and Hurd did some competitive positioning against an enemy and a ‘frenemy’, boasting of triple digit growth for the Fusion apps.

“In HCM, we added 250 customers or roughly four to five times the number reported by Workday.

“In customer experience, we had more than 260 new customers with strong growth across all our solutions, marketing, sales, service and social cloud. Our 60% plus cloud booking growth is considerably higher than Salesforce.com.

“So let me say that one more time cloud, cloud, cloud, it’s generally where Fusion is deployed.”

Hurd talked of bookings growth up over 60% for Oracle’s cloud applications and quarterly cloud apps revenue in the region of $300 million - which is a big number until you realise it equates to around 3% of total revenues. Still a way to go...

Cloud impact

So perhaps it was hardly surprising that CFO Safra Catz was keen to lay down some lines when it comes to reading how Oracle’s cloud commitment impacts on the wider financials:

“Most obvious is that revenue is initially lower as subscription license revenue is recognized over the life of the agreement as opposed to license revenue being taken upfront.

“Over time, since we are providing much more than just the software and the updates, the revenue is higher.

“The additional value we are providing is the hardware, including our engineered systems, the hosting and the expertise that only Oracle can provide, while leveraging the economies of scale that we have. So while customers are paying overtime, they are using and paying for more Oracle products through cloud subscription.

“They are paying less than total because they too can benefit from our operating synergies. Net-net, the cloud operating business is attractive for both customers and for Oracle, but especially so given the integration of Oracle hardware, software and expertise.”

On the hardware front, Oracle remains in a transition phase, despite Hurd’s declaration that Oracle is growing while rivals slip back, citing an imminent landmark of selling more than 10,000 engineered systems. But there is growth and some sign of recovery.

CEO Larry Ellison added that while a couple of years ago, engineered systems accounted for a small percentage of business, it’s now 30% of the hardware operation. But at the same time other factors are in play to balance this out:

“The x86 commodity business which used to be a big business when we bought Sun has now shrunk to almost nothing.

"So our hardware business has gone through the transition where we got neither the commodity storage business, we got neither the commodity server business and replaced it with computing systems with a lot of our own intellectual property.”

It was to an ironic customer reference point that he pointed to substantiate why he sees the Oracle hardware play as a strength:

“World largest cloud computing [firm], we delivered an Exadata System to them. They moved their application and got in live in three weeks and experienced 10 times better performance at a fraction of the cost.

“This is not uncommon. When we installed an Exadata Machine or a SPARC SuperCluster to have a very rapid implementation, delivered terrific performance and at a dramatically lower overall cost because all of the complexity of integration is done by us, not by them.”

Ellison declined to name the client in question. But by complete co-incidence minutes later he said:

“I just recently got a note from [Salesforce.com CEO] Marc Benioff who is excited about bringing in Exadata and 12c [database] and making [that] the basis of Salesforce.com’s cloud computing infrastructure

“So we are seeing adopters with very, very high standards in terms of having to supply millions of users, reliably and cost effectively in the cloud. Talk about moving their entire business to 12c and Exadata. That’s just the tip of the iceberg of these hyper-scale companies.”

And that’s where we’re at in a world built on cloud, cloud, cloud.

The enemies become frenemies and then become customer references.

Changed days indeed.

Verdict

Clearly Wall Street saw it as an uninspiring quarter and reacted accordingly.

Is it down to transitioning to new models of delivery and new offerings such as 12c? Hurd talked about Oracle’s cloud learning curve, for instance.

For his part, Ellison argued:

“We have a new set of competitors, and we need a specialist sales team that’s used to competing with Amazon. We’re lining up against all our new competitors and making sure we have sales capacity as well as a new set of products.”

Or is it as Techmarketview’s Angela Eager suggests:

the on-going downshift is from straightforward lower sales rather than the impact of Oracle’s own shift to the cloud and subscription revenue.

Even so, there was growth. Revenue growth and profit growth - the latter of which is something that cloud pureplays are still trying to get to grips with.

There’s also lots to come in the next few months that could have an impact: in-memory technology for 12c, the general release of Oracle’s PaaS and IaaS offerings and updates to the Fusion range.

All eyes will now be on the fourth quarter numbers.

 

Disclosure: at time of writing, Oracle, Salesforce.com and Workday are all premium partners of diginomica.