Oracle disappoints for Q1 as revenue growth slows

Net income was up 6% to $2.3 billion, but that was about the only good news to come out of Oracle’s Q1 numbers yesterday, with Wall Street pushing down on the share price in their wake.

Revenue for the quarter was $9.2 billion, up only one percent year-on-year. Using its new reporting categories, Cloud Services and Licence Support showed year-on-year growth of 3% to $6.6 billion, while Cloud and On Premise revenue fell 3% year-on-year to $867 million. That’s the second consecutive quarter of decline following a 4% drop in Q418. Hardware sales fell 4% to $904 million.

Add to that a highly cautious outlook for the next few quarters of growth of between zero and 2% and Wall Street’s downer on the stock isn’t hard to explain. That left CEOs Mark Hurd and Safra Catz and Chief Technology Officer Larry Ellison trying to push an upbeat tone during the post-results analyst conference call.

ERP focus

Ellison narrowed in on Cloud ERP as being one of the two strategic products for Oracle, the other being the Autonomous Database. He boldly stated:

Oracle is already number one in ERP cloud market share with over 20,000 Fusion and NetSuite customers. Customers are buying Fusion ERP to replace their existing SAP on-premise ERP systems. And customers are buying Fusion ERP to replace their existing Workday Cloud ERP system. ERP is the largest segment in the application business. Continuing our rapid growth in Cloud ERP market puts Oracle well on its way to becoming the world’s largest SaaS applications company. That’s our strategy and current market position in the SaaS layer of the cloud.

In fact, it’s NetSuite ERP that’s the big contributor here. NetSuite customers now number 15,000, while Oracle’s home-grown Fusion ERP has around a third of that on 5,500. Hurd picked out NetSuite as having had “a spectacular quarter”.

NetSuite's performance was actually another bright spot, with revenues up 26% and bookings up 40%. NetSuite is now said to contribute  annualized revenue of around $800 million to the wider Oracle balance sheet.

Hurd argued that NetSuite has benefitted from becoming part of the Oracle mothership, claiming it was:

...sort of the best of NetSuite and best of Oracle combined... think the management team in NetSuite has done a great job. Our attrition is down. We’ve also been able to supplement the NetSuite sales organization, with our traditional recruiting, our traditional college hires. And frankly, they’ve done a fantastic job incubating them, absorbing them and getting them productive. They probably wouldn’t have done this as a public company because of short-term quarterly earnings per share requirements. We invested in them.

Hurd also highlighted some ERP wins from the first quarter, citing AirBnB , Santander Consumer and Fedex. Of the latter, he said:

FedEx is...a traditional Oracle user. They bought a company called TNT in Europe that was an SAP user, and they are now going to standardize all of their ERP on Oracle Fusion ERP. In addition to that, they bought Payroll from us in the quarter. They happened to be a Workday HCM customer, but bought Payroll from Oracle. This is one of the most significant transactions we’ve had over a course of a number of significant transactions, but a very strategic and significant one, with a replacement of SAP as a combination of a migration of an existing Oracle customer.

Databases and Amazon

On the database front, Ellison returned to a familiar meme of Oracle being the platform for most of its rivals:

The Oracle database is so much better than other databases. Even our biggest competitors use it to run their businesses. Salesforce.com uses Oracle to run their Sales Automation Cloud. SAP uses the Oracle database to run their cloud services and nearly all their on-premise customers. Even Amazon uses the Oracle database to run most of their business.

And on the Amazon saber-rattling that’s become the latest battle-cry, Ellison said:

Today, we may be behind Amazon in infrastructure market share, but we are way ahead of Amazon in cloud infrastructure technology. We think that will allow us to gain market share in infrastructure in the cloud very, very rapidly.

That said, he did concede that Amazon was a tough competitor:

Now, there might be a reason why you decide to use a database [that is] not as good. If you’re committed the Amazon cloud and you’re getting a lot of stuff at the Amazon cloud and Amazon sells Redshift or Amazon sells a number of different databases...So, people tell I’m going to use whatever Amazon has in the cloud. And there a number of people do that. And that happened to us in the previous generation when a lot of people chose to use Microsoft’s database because the content was easily available with Windows. So, we do see that. We’re not the only database around.

However, in terms of technology, if you want the highest performance, if you want the highest reliability, if you want the highest security and if you want the lower cost, the performance translates into cost. The reason the Oracle database is much cheaper than the Amazon database is because Amazon charges per minute. We charge per minute. If we can do more in one minute, twice as much in one minute than they can, we’re half the price.

Fighting words and vintage Ellison, but overall it was a conference call that wasn’t able to convince Wall Street, at least in the short term. Hurd nonetheless insisted that there are reasons to be bullish:

Our team here at Oracle believes their destiny is to win every deal..they believe that we’re going from a technology perspective to be in a position to win virtually every deal. And that’s the attitude we go into with this...confidence on my side is really high, shows up in our pipeline and our results.

My take

Hurd and the exec team did their best to be ‘glass half full’, but their position wasn’t helped by the new reporting categories which render the cloud numbers opaque at a time when there’s a class action suit involving allegations around cloud sales.

Investors may also have been rattled by the recent departure of Thomas Kurian, President of Product Development, on extended leave. Nothing much was cleared up about how long he would be absent, with Hurd merely saying when prompted:

Thomas is a good guy, works hard. He’s taken a break and we expect him back.

Overall, not the best start to Fiscal 19 by any manner of means. Catz talked about stronger performance in the second half of the year. Wall Street will be keeping a close eye out. Getting confidence levels up there is the priority now.