I like these guys in general because they make me think. But very often, I come to opposite conclusions and this is a case in point.
Item 1: The endless transition
Oracle (NYSE:ORCL) is still in the midst of its seemingly never-ending transition to the cloud. While management has repeatedly promised that success is right around the corner, we’re not so sure.
I go to all the Oracle analyst events that I am invited to and as you read this I am at another such event. That’s important because my definite recollection from Larry Ellison, Mark Hurd, and Safra Catz at various times is that the move to cloud computing will take the company on the order of ten years.
This is not retrospective historiography. Larry Ellison has been through several major industry pivots and he likes to point out that they take the order of 10 years. He, and the others, have invoked the 10-year metric for this transition as well.
Consider what’s at stake. If anything, the enterprise technology industry is soft-pedaling the effort by describing it as a transition to the cloud. Oracle has more than 2,000 products ranging from its iconic database, hardware, operating systems, applications, development tools, a growing global network of data centers, and some inventions that have yet to be announced.
Virtually all the product line is affected by the transition. When they’re done in ten years the world will have an information utility comprising similar systems from IBM, Microsoft, Salesforce, SAP, Amazon and many other vendors. My point is that this is not a transition in the conventional sense. It is a complete re-make of the industry and nobody said it would be quick or easy. Profitable, yes.
Item 2: I have some oranges here. Can you please find me some apples for comparison?
Okay, not to be disrespectful but…given the foregoing, Adobe and AutoDesk are one trick ponies in comparison to Oracle. Their transitions were tough because they involved a fast track change to the business model but the companies had fewer products and a narrower range of ways to make money. But the changes were relatively quick. So score one for them but keep in mind that ain’t what we’re talking about, is it?
Item 3: Er, tell me something we don't know
Oracle’s transition does not appear to be following the same pattern as those two successful companies. Because of this, we think the company’s cloud transition will continue to remain a work in progress for the foreseeable future.
Bingo! Though I’d object to identifying Adobe and AutoDesk as successful and not Oracle. Oracle is on a bigger, longer, more complicated quest and it is being deliberate about ensuring that its current legacy customers have all the time they need to migrate. They even allow for the possibility of standing pat.
One favorite example is Bring Your Own License (BYOL) which says that customers can move a legacy license to Oracle’s cloud Infrastructure for no license fee.
This brings up another important point: Oracle’s customers have to want to make the transition for it to be successful. This means new expenditures and some write-offs.
There’s some apprehension about Oracle’s growth, a reasonable concern for anyone in the financial analyst world needing to advise clients. Here are some things to consider.
The article shows a graph of quarterly growth rates for the three comparison companies. Less than 2 years ago Oracle’s growth rate was about 60% and more recently it was 30%. In a similar, though not identical, span Adobe went from about 60% to a bit over 20% and AutoDesk dropped from the mid-20% range to a bit over 10%.
The transition from on-premise legacy computing to the cloud changes one’s business model from capturing all of the license revenue from a deal at once to capturing smaller amounts rateably over the time of the contract. In addition, there’s a large portion of revenue that must be allocated to R&D, and of course, any charge against the treasury is a drag on profits and growth.
I am not a financial analyst; I am a software analyst. I deal with numbers, but I care much more about whether or not products work than what they cost or how profitable they are. So my take on the financial community’s clucking about revenue numbers is often tempered by the analytical differences. In this case, I don’t see much to be alarmist about.
When Fusion (as the original cloud solution was called) was first mooted, Ellison did make the monumental blunder of assuming it would be a relatively fast rewrite. He's on record as acknowledging that. And I give him and the company a lot of credit for NOT rushing to the market with a half-cocked product but investing to get the solution set right.
I’ve written before that Oracle’s success in the cloud will be based on multiple factors, one of which is building out its data center network. That's because you can’t sell infrastructure until you have an infrastructure to sell. Prior to completion, all the datacenter build-out is a pure expense with no revenue to attach to it.
Bear in mind that Safra Catz, Oracle's chief penny watcher, has ALWAYS been conservative in her assessment of what to put against what and, in any event, when there's no revenue to put against an expense, you have to write it off per accounting rules.
Transitions like the one that Oracle is attempting are big, hairy, and full of surprises. The company has done well keeping the wheels on the road but no one should expect a fast or tidy finish. So while my reference to nirvana may be a tad whimsical I remain confident that Oracle will make a success of its development efforts.
Oh - and the same general issues apply to SAP, IBM, Microsoft and the many other vendors making a similar transition.