I'll get this out the way up front. I have no special inside knowledge and I am lousy at predictions which is why I try to avoid them. But, while earnings calls are always fun times for us, few are more entertaining than those fielded by Oracle. This time, we expect the Q1 FY2018 call to be especially interesting. Here's why.
Oracle's stock has performed very well over the last 12 months, climbing some 29% to a close of $52.8 and a market cap just under $207 billion at time of writing. That last number is important for reasons that will come clear in a moment.
Analysts are impressed with Oracle's momentum across SaaS, PaaS and IaaS lines of business. The release of detailed data in the last earnings release fueled a degree of optimism that has seen the stock price accelerate. At the time, Larry Ellison, CTO said:
Last fiscal year we sold more than $2 billion in cloud Annually Recurring Revenue. This is the second year in a row that we sold more cloud ARR than Salesforce.com. We are now well on our way to passing them and becoming number one in the enterprise SaaS market.
The reason we are confident that we will pass Salesforce is because we have a three-fold SaaS application suites for ERP, for HCM and for CRM including financials, procurement, supply chain, manufacturing, human resources, payroll, marketing, sales and service. Salesforce in contrast only competes in three of these nine market areas.
Furthermore, Oracle is now the clear leader in cloud ERP and ERP is by far the largest application market, not CRM.
Impressed? Yeah, I think so. But I'm more impressed by what I saw in a regulatory filing from 5th September. In that filing, Oracle spelled out the manner in which is plans to compensate its top executives. Those are Ellison along with co-CEOs Mark Hurd and Safra Catz.
Here's the deal
What makes the filing remarkable is that not only are these executives effectively volunteering for a whopping 47% reduction in their compensation packages, almost all their compensation over the next five years is pegged to a series of financial measures. Those measures are an admix of stock price target, cloud revenue adds and cloud margin performance.
While it is not unusual to see executive pay linked closely with performance, this is the first time I have seen a document that spells out exactly what Oracle anticipates. The following illustration from the presentation provides the detail:
The stock price metric is $80 which aligns almost exactly with the amount by which Oracle is targeting market capitalization growth. Notice that baseline market cap figure? Almost identical to today's price.
The operational goals are also in line with past remarks by Safra Catz when she talked about improving margin from 65% to 80% as the long term goal for the SaaS business and recorded remarks by Ellison noted above.
Parsing the deal
There are lots of ways to parse this filing's contents but several things stand out to me.
- First, despite ongoing deterioration on Oracle's hardware business, the company clearly believes that PaaS/IaaS growth in particular will more than compensate.
- While on-premises sales flatlined last time around, and we can expect to see some decline, Oracle believes that SaaS growth will more than compensate.
Cynics will no doubt speculate that Oracle's numbers on SaaS in particular can be readily massaged depending on how the company chooses to 'count' revenue. I am not so easily persuaded. In order to do a 'double shuffle' the numbers have to come from somewhere and there are only two places that can happen: software sales and maintenance fees. While I can see a case for declining software sales, the same is not so true of maintenance, the engine that pretty much feeds everything else Oracle is doing. Any slippage in that arena will be pounced upon very quickly because the margins there are too high to sacrifice without a staggering fall in operational cash flow.
Here's where it matters to buyers. Very much like SAP, Oracle's ideological view of all things cloud is that they represent a business model replacement on a near like for like or improved like for like basis to the old maintenance model. That means customers can anticipate paying more rather than less in the long haul.
Conventional wisdom in the general cloud world is that prices remain static or fall over time. Check Amazon as the benchmark. But, that has not been the case for Salesforce, Workday or SAP cloud customers. These companies are managing to maintain or increase price points. For example, where once Salesforce was seen as a lively competitor in the SMB space, you don't find many (any?) Salesforce customers crowing about the cheapness of their deployments. At Workday, where once the company cut all manner of deals to gain traction, those days are long gone, and you now need relatively deep pockets to buy into a Workday solution set.
Oracle has been something of a mild exception as it too is endeavoring to gain traction. The addition of the relatively low cost NetSuite contributes to that position. For the moment. And make no mistake, it really is winning based upon the soundings I have been able to make.
Just to add a smidgeon of interest to this tale, through outreach from Oracle, I along with others have been encouraged to dial in to tomorrow's earnings call. Nothing more has been said but to me, that telegraphs a big fat Q1 outcome.
Make no mistake, Oracle is not afraid to trumpet its own successes and if it has had a blow out cloud quarter then expect the team to tell you just how great they are in tried and true Oracle fashion. But the fact that the company has tied all three top executives to the same target, which by the way, amounts to each trousering about $100 million over the five year timeframe, tells me that while we might in the past have dismissed Ellison's statements as the ravings of someone sucking too much of their own Kool-Aid, that can no longer be the case.
There is one problem with this scenario. The document is silent on the question of net profit. That worries me in the sense that Oracle may find it necessary to outspend its competitors in sales and marketing in order for those numbers to become reality. That will directly hit the bottom line but to what extent, we cannot yet know. A hint of that comes in a recent announcement that Oracle is hiring a 1,000 more sales people for EMEA. That's a LOT of compensation. And although not entirely clear, that 1,000 would appear to be additional to the 1,400 new hires it was aiming for in 2016.
Regardless, as I perused previous coverage from Oracle events, it became clear to me that the company has spent a lot of time laying the groundwork for this push. For example, in January 2014, Hurd said:
There’s nothing that’s better than having a CEO who believes that marketing is critical, and is going to support its leadership role. If you get that, good things are going to happen.
The challenge going forward – customers are very willing to talk about their bad experience but we live in a world of transparency. It’s even for everybody. My warts are out there but so are yours. It doesn’t take a big percentage of unhappy customers to trash your brand so that last few percent in customer satisfaction becomes really important. I can’t afford to have unhappy customers. We have to work towards ensuring that every customer is a happy customer and that takes a lot of things to happen inside the sales and marketing organizations.
In short, Oracle is prepared, continues to build and, inline with what I consistently hear, is working very hard to get a solid group of happy customers who will come back for more.
There is of course always a flip side and for that I have to put on my cynic's hat. It could be that with such lofty goals and a whopping reduction in overall compensation, that Oracle is signaling towards an impossible dream that, if it doesn't come off, won't really matter because the top three executives have already made enough to last many lifetimes. Somehow though I can't see that.
In the meantime, let's see what the earnings call brings. I just hope I don't end up getting egg on my face. But then it won't be the first time.