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Oracle hit as Wall Street's greedy appetite for cloud cash isn't sated

Stuart Lauchlan Profile picture for user slauchlan December 14, 2017
Oracle handed in some strong quarterly numbers yesterday, but Wall Street sent the share price down as its appetite for cloud growth wasn't fed.

oracle team
Catz, Ellison, Hurd

Oracle took a hit from Wall Street investors yesterday despite turning in better-than-expected quarterly numbers. The main problem? While overall numbers beat analyst expectations cloud sales did not.

This despite a 44% year-on-year rise in cloud revenue to hit $1.5 billion in the second quarter, topping Oracle’s own forecast cloud growth of between 39% and 43%. When it comes to Oracle’s cloud push, Wall Street has got the taste now and is getting greedy, looking for $1.56 billion.

That being the case, Wall Street spirits were then also dampened by third quarter outlook from CEO Safra Catz that cloud revenue growth will fall back to between 21% and 25%.

The upshot of all this was that, despite an overall positive set of figures, the Oracle share price was down 4% following their release, before dropping by around 7% at one point.

Breaking down the cloud stats, SaaS offerings saw a 55% year-on-year growth rate to deliver $1.1 billion in quarterly revenues. In contrast, the PaaS and IaaS businesses combined turned in only $398 million between them, although Catz was quick to provide a factor for consideration here:

As a reminder, part of the Cloud PaaS and IaaS business is our legacy hosting services which don’t share the same high growth characteristics as PaaS and next-gen IaaS services…the traditional hosting services, which we are de-focusing, were down nearly 10%. As traditional hosting services become a smaller part of total PaaS and IaaS, the underlying growth and PaaS and next-gen IaaS will be more visible.

Her co-CEO Mark Hurd was on hand with his own ‘big numbers’, including ERP up 66% “organically” to hit a $1.4 bilion annual run rate and Fusion HCM up 77%:

If a customer wants SasS ERP, there really isn’t a competitive dynamic. So, it’s really us. We really lead in that category - and the reason we lead is because there’s nobody else. Full stop. Now to the degree that HCM is combined with an ERP, which is becoming more and more the fashion of what you’re seeing, then we’re obviously significantly advantaged. We have a competitor in SaaS HCM. We don’t have a competitor in SaaS ERP.

The shift to the cloud is bringing new commercial opportunities, he added:

Historically, if you went back six, seven years ago, we’d typically call on the Oracle base of customers and the other traditional older on-premise ERP company, SAP. Once you bought SAP, once you bought Oracle, those people didn’t move calling on the other customers.

That’s all changing now. So now as customers get more aware of the difference between a traditional on-premise ERP and a new modern SAS ERP, we get a chance now to compete for their, these competitor customers that frankly, we hadn’t had a chance to compete for, if you will, in the older generation of applications.

Who's quitting Oracle?

On the subject of competitive dynamics, CTO Larry Ellison hit back at market scuttlebutt that Oracle has lost a number of customers, something that seems to have hit home:

Let me tell you who’s not moving off of Oracle. A company you’ve heard of just gave us another $50 million this quarter to buy Oracle database and other Oracle technology. That company is Amazon. They’re not moving off of Oracle. Salesforce isn’t moving off of Oracle. Our competitors who have no reason to like us very much continue to invest in and run their entire business on Oracle. I don’t know whose moving off of Oracle…Amazon, you’d think Amazon would really want to move.

Let me tell you someone else who’s not moving off of Oracle, SAP. They had that database called HANA they’d like to move to. SuccessFactors, they’ve been trying to move off of Oracle for five or six years. SAP is running on Oracle. Ariba runs an Oracle. All SAP large customers run on Oracle. Amazon continues to buy Oracle technology to run their business. Salesforce runs entirely on Oracle. Go ahead, you tell me who’s moving off of Oracle.

Mention of Amazon inevitably leads to the imminent arrival of the Oracle Autonomous Database, the self-styled Amazon Redshift killer and the start of the next phase of Oracle customer migration to the cloud, predicted Ellison:

The first big move of Oracle customers databases to the cloud really will begin in January. There’s been no big migration anyplace of Oracle databases into anyone’s cloud, including ours. There’s been some, but it’s a relatively very, very small business. This all begins to happen starting in January, where the capabilities of cloud are so much better. The economics in the cloud are so much better than what’s available on premise, that we think our customers are going to move very, very rapidly to the cloud. But they are waiting for our Autonomous Database.

My take

As frequently noted, the journey to the cloud was always going to be a long one and one with a few bumps in the road to navigate around. Managing Wall Street’s expectations is one of the recurring bumpy bits and yesterday investors were left disappointed, in the main due to over-inflated expectations.

The next quarter will be an interesting one to watch as SaaS growth is likely to be hit by the full incorporation of NetSuite into year-on-year comparisons. A lot of attention will also inevitably be paid to that Autonomous Database migration that Ellison predicts will kick off in January. Investors will be looking for early signs of healthy take-up by the time the next quarterly numbers are released.

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