Oracle looks to cloud silver lining

Larry Ellison is predicting an era of even higher margins at Oracle as customers switch to its cloud offerings – at least when it's worked through the little issue of revenue regime change.

With the announcement of the company’s annual results yesterday, the Oracle CEO told analysts: “When someone chooses an Oracle application in the cloud versus an Oracle application on-premise, we make more money over time. The order [in which] that money comes is a little bit different because we take it ratably rather than a big chunk up front, but a cloud customer is economically more valuable to us over time.”

Until it gets to that time though, the company is having to carefully navigate through that transition of revenues from software licenses to cloud subscriptions. The latest numbers for its fourth quarter show anaemic growth in new software sales of just 1% to $4.03 billion (for both license and SaaS subscriptions).

Splitting those two apart shows sales of Oracle cloud applications – HCM, CRM and ERP Cloud – grew by 51% to $258 million over the three months (and doubled to $910 million for the full year to 31 May ), as over 500 customers signed up for its SaaS offerings, 300 of those for its Taleo and Fusion HCM lines. However, that only underscores how on-premise applications software sales are being depressed by the shift to cloud offerings. New software licenses fell by 1% to $3.77 billion in the quarter and were slightly shy of 0% (down $40 million) for the full year. Annual margins stood at 37% pre-tax and 29% net.

Nonetheless, Ellison is adamant that the pace of its charge into the cloud arena will not let up. “We are growing very fast in the cloud; especially the HCM cloud. We’re larger in SaaS than anyone else but Salesforce.com,” he said. And in terms of annualized SaaS revenue, Oracle is now “larger than Workday and SAP combined,” with a SaaS revenue run rate of over $1 billion.

“We added more new Fusion HCM customers last quarter (not Taleo customers) than Workday added HCM and ERP customers,” he maintained.

There are certainly interesting aspects to the pattern of that take up. According to Oracle CFO Safra Catz, most customers who buy Oracle SaaS products are doing so as a “complementary offering to what they already have on site.” Whether that again points to a transition and the ultimate retirement of many software licenses is yet unclear.

Behind its cloud business growth though is a distinctly cloud-centric sales drive. The bulk of the sales people Oracle has added in Europe and North America has been focused on its cloud offering and not around its traditional on-premise database or applications business. “And we’ll continue to add [there],” said Ellison, citing the fact that “virtually all" of the 500 sales staff it has hired directly out of college this year will join the cloud campaign.
Updated: June 27, 2013

Photograph: Oracle