Oracle reports Q3 FY2020 - Fusion enabling 'multi-pillar' deals, Coronavirus has little immediate impact

In a quarter that beat expectations, Oracle was careful to set expectations for both the immediate future and FY 2021 given the novel coronavirus COVID-19 pandemic. Early on in her remarks, Safra Catz, Oracle CEO said:

We are largely conducting business as usual...it is not yet clear what the effect of the virus will be on our business...we expect minimal impact of the virus in the next quarter...but I am giving you a wider than normal range of expectations. 

That range was 2% revenue decline to 2% revenue growth in the fiscal fourth quarter. But back to the present. 

Overall, Oracle reported revenue of $9,796 million, slightly above expectations representing growth of 2% from the same period in 2019. Hardware sales fell 6% compared to last year while cloud license and on-premise license fell 2%. Cloud services and license support grew 5%. Operating income grew 5% to $3,528 million year-over-year. On the balance sheet, Oracle holds cash and securities to the tune of $25.8 billion but with $51.5 billion in debt. 

I was surprised that the analysts on the call didn't probe Catz or CTO Larry Ellison on the extent to which the company is modeling for the COVD-19 impact. You can argue that we are still in the relatively early phase of this pandemic and therefore predicting outcomes even a few months ahead is fraught with risk. Even so, I would have liked to hear more color on the topic, despite optimism shared around protecting share buybacks and dividends. Said Catz:

There's no question we can support our dividend with ease. And any kind of increased dividends? We could support that. Also, our business is very strong, as is obvious. It generates very large amounts of cash. We believe as you can tell, I'm not going to comment on future buyback. But obviously, you can tell we have been buying back our stock. We think it's an incredible deal it has basically gone on clearance sale in the past few days.

In fairness, the company made reference to the fact that a significant portion of its sales and servicing is conducted virtually from offshore centers. Instead, Ellison returned to his favorite narrative of unfavorably comparing competitors to Oracle's offerings, reeling off a series of competitive wins and logos buying into the company's products and services. 

We expect the cloud ERP market segment to be two to three times larger than the prior on premise ERP software market. We already have a huge lead in the cloud ERP market with over 7,000 Fusion ERP customers and 21,000 NetSuite ERP customers. Our primary ERP competitors are struggling. SAP never rewrote their ERP applications for the cloud. And today many of SAP's largest customers are actively working with us to migrate from SAP to Fusion ERP in the cloud. Workday, the other competitor is seeing very little success in cloud ERP.

Referring to 'multi-pillar' deals, Ellison noted that Johnson Controls 

... signed a $15 million annual recurring deal that included ERP Oracle Fusion cloud ERP Enterprise Performance Management, Supply Chain Management, and CX four marketing, Fusion Marketing, Fusion Service, Fusion Sales, e-commerce and configure price quote.... selling the suite has enabled us to sell a lot more HCM as part of the suite. 

Warming to his theme, Ellison was clearly champing at the bit to talk customer logos where SAP customers are due to go live in the summer.

They're (SAP) still programming in a language called ABAP. It's their proprietary programming (language.) We program in Java but they program in ABAP because this is a 35-year-old technology they never rewrote for the cloud. Their largest customers are aware of that. They are looking at us and I have never seen except in the early days when we had the first commercial relational database, and Oracle growth grew its franchise which really created our Oracle brand. Never seen an opportunity like this to take out the winner of the of the on premise ERP wars. They beat us in the on-premise wars and it looks like they missed the cloud entirely. So the scale of this opportunity is enormous. We're getting real deals signed with their largest customers, we're implementing divisions and their largest customers we will have live by this summer...So the scale of this opportunity is just enormous. And that's going to help drive our growth.

On the infrastrucutre and database side, Ellison claimed wins against both AWS and Microsoft, saying that the autonomous database is proving itself to represent a much lower cost of operation than that of its competitors. 

This one is really interesting, Depository Trust and Clearing Corporation (DTCC). 98% of all global trades going through any accredited brokerage firm, settle and clear using Depository Trust and Clearing Corporation's repository trading system. DTCC is migrating their multi terabytes, Amazon AWS redshift system out of Amazon and into our public cloud using the Oracle autonomous database. They're also moving their analytics from Amazon to the Oracle analytics suite.

My take

Oracle's earnings are especially interesting since it is the first major vendor to report progress following the COVID-19 pandemic. Analysts will take this as a benchmark against which they assess other firms who report in the coming months. 

Oracle's own transition to cloud revenue has not been an easy one and the uncertainty brought about by COVID-19 doesn't help. Referencing SAP and AWS customers is always good fodder for Ellison's talking points.

Ellison was careful to advise that many of these projects are both in progress and not global but rather referenced projects are at divisions. The company hopes that divisional success will lead to 'land and expand' opportunities but that is far from the proverbial done deal. You can be certain that competitors are equally alive to the risks they face and have strategies designed to either block further incursion or have win-back strategies. 

Interestingly, Ellison noted that Salesforce represents a more formidable competitor, largely because it was born in the cloud and Ellison's stock arguments don't apply there. 

Endnote

Subsequent to our filing this story, PR representatives of DTCC contacted us to say:

On March 12, 2020, Oracle inaccurately reported during its Q3 earnings call that DTCC was migrating a “multi-terabyte data warehouse” from Amazon Web Services to Oracle’s public cloud service. DTCC uses AWS to support a variety of business functions, and DTCC does not have any plans to move applications from AWS to Oracle. DTCC employs a number of Oracle products, including Oracle Autonomous Database and Oracle Analytics Cloud, which support DTCC’s corporate HR and Finance functions. Currently, DTCC’s core clearance and settlement services for the U.S. securities markets are not delivered through any public cloud.

Oracle replied by email to say:

We’ve looked into this and wanted to provide the clarifying statement below: 

Any interpretation of Larry’s comments to imply DTCC’s core clearance and settlement services for the U.S. Securities markets are delivered through any public cloud is inaccurate.