Like many of its cloud applications rivals, Oracle has started to publicly define its success in the SaaS market in terms of bookings rather than revenues.
It’s a definition that has only become evident in the last couple of weeks, but one which goes to the heart of how cloud sales are recognized, especially among venerable software companies navigating the revenue transition from mostly license sales, paid upfront, to mostly software subscriptions, typically paid monthly and on an on-demand basis.
The shift also coincides with the fact that Oracle’s SaaS revenues have flattened in recent quarters as its once-strong growth in cloud apps has gone off the boil (see graph).
Oracle’s 10Q quarterly filing to the SEC in late December shows the company’s cloud applications revenues hitting $259 million, up just 19% on the same period a year ago and roughly the same amount it has recorded during the previous two sequential quarters. The SaaS growth rate in the last six months, in particular, is now looking decidedly anaemic, especially compared to the 145% pace the company was loudly proclaiming a year ago.
Presumably, that is why bookings rather than revenues are the figures that have been featuring in Oracle’s latest financial press statements. In the most recent quarterly annoucement, CEO Larry Ellison cited bookings growth of 35% within the SaaS division, with no mention of where the unit’s revenues stood, with its Fusion Human Capital Management and Fusion Salesforce Automation lines “each growing bookings at a triple-digit rate.”
Among cloud vendors, bookings are increasingly being used to provide guidance on sales — Workday, Adobe and NetSuite, among others, now defined their SaaS success in terms of bookings — though the term is hardly well-defined. They are, after all, the orders recorded by sales people which are not recognized as revenue until the revenue can be recognized under SEC rules. In pre-Sarbanes-Oxley days, when revenue recognition was a much looser business, there were frequent shortfalls between the bookings software companies highlighted to Wall Street and the actual amounts they ultimately took in, resulting in painful restatements, share price tumbles and class action suits.
That may be why the word bookings has yet to re-appear in Oracle’s 10Q or in any formal filings in recent years.
But, arguably, at least during the transition years, bookings are a better metric than revenues for SaaS health. As Oracle slowly moves its primary revenue base from license sales to subscription fees, there is an inevitable hiatus in revenue flow. In its most recent quarter, 11% of Oracle software sales came from subscriptions, a figure that has crept up from 9% a year ago. But assuming the bookings are being tightly qualified by Oracle’s governance teams and those bookings turn, in due course, directly into revenue, then they are certainly a sign of a SaaS business in good shape.
Oracle’s HCM wins in its most recent quarter included a flagship bunch — BT, InterContinental Hotels, Marks & Spencer and Siemens — while in SaaS CRM new deals were struck with Tesco, the Washington Post and Proctor & Gamble. When any of those revenue streams is due to kick in has not been made clear. But, ultimately, as cloud sales build they will offset any shortfall in traditional license revenue but not until they have reached a critical mass.
Time for a SaaS surge
Oracle is clearly trying to carefully control the transition, maintaining the license revenue base as solidly as it can while not letting the cloud revenue stream build too fast — a tricky balancing act. In the most recent quarter, Oracle’s licenses revenues dropped by 2% to $2.12 billion, and have shown little or no growth since the end of calendar 2012.
The real test will come in the current and the fourth quarter. Assuming the bookings start to translate into revenue flow at anything like the rates suggested, then Oracle will rise substantially above its $257 million run rate and will be showing signs it’s weathering the transition to cloud.
Of course, if those signs aren’t there, there’s always a stopgap. The company can always continue its strategy of buying SaaS revenue by acquiring start-ups in the area, something it has not been shy of doing in the past few quarters when its M&A hit rate has been running at a company every month or so.
Disclosure: Oracle is a diginomica partner at the time of writing
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