Ellison pledges data center build out after a Q2 when demand outstripped supply for Oracle Cloud Infrastructure

Profile picture for user slauchlan By Stuart Lauchlan December 11, 2020 Audio version
Summary:
Oracle turns in a steady Q2 as Larry Ellison flags up ERP successes and OCI demand outpacing capacity.

Larry Ellison on stage at oow17

Oracle turned in Q2 numbers with total revenue up two percent year-on-year to $9.8 billion with a net income of $2.44 billion, up from a comparable $2.31 billion last year, as demand outran capacity for the firm’s Oracle Cloud Infrastructure (OCI) offering.

Cloud services and license support revenue was up 4% to $7.1 billion, but cloud license and on-premises license revenue fell 3% to $1.09 billion. Hardware was also down 3% to $844 million while services revenue fell 7% to $752 million.

On the post-results analyst call, CEO Safra Catz noted that COVID-19 continues to create an uncertain climate for many customers and for Oracle as a result:

The pandemic affects us in some ways negatively, in some ways positively. Simply because of our size and the breadth of our customer base, [it] affects them differently. Obviously, our hospitality customers have had a very difficult time of it in the main. Some of our retail customers have done horribly, some have done very, very well. What has become very clear to our customers is that those that are digitally-forward and that can work with a lot of automation using a digital tool, using our technology, using the cloud, they are faring far, far better.

She added:

Obviously, there was uncertainty before because of the pandemic. At this point, I think it's very clear that our business is accelerating. Our stable businesses remain stable and our shrinking businesses, whether it's non-strategic hardware or other things, those continue to get smaller. But generally, the overall revenue number will be showing acceleration even in this pandemic and, I almost feel badly saying, maybe it helped ultimately because many of our customers have realized the importance of using technology to deal with their customers, their employees, their suppliers.

Applications growth

Chief Technology Officer Larry Ellison drilled down on two areas of success, starting with cloud ERP. Fusion ERP grew 32% in the quarter and ended with 7,500 customers, while NetSuite grew 21% to over 24,000 customers. That left room for some Ellison bragging rights:

There is no large-scale enterprise application business in the cloud that's growing as fast as we are. In the coming months, our cloud ERP market leadership will become even more obvious when we announce that several major large-scale SAP ERP customers are leaving SAP and moving to our Fusion ERP cloud. Oracle is the clear market leader in cloud ERP.

He added:

SAP forgot to move their ERP system to the cloud. They decided instead to go compete with Oracle with HANA. They don't have a cloud product…We have over 30,000 customers in the cloud, running our cloud ERP systems. Who's second? Workday with a few hundred? I mean it's not close. And that's the largest applications business [ERP}. That's the largest applications business on-premises and it will be the largest applications business in the cloud and we're the overwhelming technology and market leader.

Notable applications customer use cases - now cataloged separately as part of the earnings release  documentation rather than having Ellison read through them on the analyst call - included financial services provider Aegon using Fusion Cloud ERP; Canon Europe deploying Oracle CX Commerce; T-Mobile using Oracle Retail Cloud  applications; and the UK Government’s Home Office, which was already a Fusion ERP user and has now gone live on Oracle FusionCloud HCM, including payroll, and Oracle Fusion Cloud CX.

OCI demand

But it was OCI which attracted the most attention from the CTO, who argued:

We just completed a great quarter, but the quarter would have been even better…if we had not been capacity-constrained in OCI during Q2. There was more demand than we have supply. To remedy this capacity shortfall, we are adding OCI capacity and building new OCI data centers as fast as we can. We are now up to 29 regional data centers around the world, more than AWS. OCI added customers and grew revenue at a rate well in excess of 100% year-over-year in Q2.

We're seeing demand for these products all over the world, and we are going into more countries. Our strategy is, because we have a large existing business, we have a large existing installed base, we believe we just have to get into more countries than Amazon, let's say, because we have to serve those countries where we have a large installed base, like Indonesia, let's say, which is a very big country, but a lot of people don't have data centers in Indonesia. Israel, I mean, it's very important to get a good data center in Israel. Some of the cloud companies has been late to get there. We think that's a very important marketplace.

So we have been building as fast as we can, but we've been trying not to build ahead of demand. We were doing a pretty good job actually until this last quarter where demand actually turned out to exceed our ambitions, where our plan for growth, though it's a very ambitious plan, still on the demand side we have some large customers that just wanted more capacity than we could supply…We’re probably a month or two away from correcting that and getting ahead of that curve. But we just see right now there's more demand than we can supply. So what are we doing? We're going as fast as we possibly can.

Among the OCI customer shout outs were Netherlands-based engineering firm Arcadis, which is moving its Oracle E-Business Suite applications to the cloud, using OCI and Oracle Analytics Cloud; Ports America, which is shifting its Oracle E-Business Suite-based financials from legacy on-premises hardware to OCI; and India’s longest-running publishing house, The Hindu Group, which is using OCI to deploy and consolidate its digital assets and content management applications.

Ellison also pointed to a number of new OCI managed services introduced during Q2, citing the most interesting as being on focusing on open source database MySQL, involving an Oracle-developed, massively parallel query accelerator, HeatWave:

MySQL plus HeatWave processes queries hundreds of times faster than the current version of MySQL by itself and other MySQL-compatible databases, such as Amazon's Aurora. MySQL plus Heat Wave is so much faster, so much easier to use and less expensive than Postgres, Redshift, Snowflake or any other database available on Amazon AWS.

The amazing thing about HeatWave is that you don't have to move your data out of MySQL and build a separate data warehouse to get the huge performance gains. You simply take any existing MySQL or Aurora database, run that exact same database on the new MySQL version that includes Heat Wave , and immediately, your queries run hundreds of times faster. You don't have to change a single line of code. It can't get any easier to use than that.

My take

The initial response from Wall Street to the latest numbers seemed to find them disappointing, but the share price picked back up to its previous level. The real story coming out of the figures is one of ongoing, steady - too slow and steady for some on Wall Street yet again - transformation from on premises to cloud. There is tangible success to see here, as Catz noted that:

Over the last 4 years, we have doubled the percentage of revenue that is being derived from our cloud services. That is what's driving our recurring revenue as a percentage of total revenue higher and higher, now reaching 73% of total company revenue. We anticipate this trend to continue as cloud services continue to grow.

PS: No mention of Zoom this time around - Amazon announced late last month that Zoom Video Communications had selected AWS as “its preferred cloud provider” so perhaps Oracle wasn’t keen to share the spotlight? - and of course no mention of TikTok and any ambitions around that. That will have to wait for 2021.