Oracle’s cloudy “nothing burger” makes Wall Street suspicious

Stuart Lauchlan Profile picture for user slauchlan June 19, 2018
Summary:
Oracle turned in positive quarterly and full year numbers, but Wall Street got the vapors about a change in how earnings are reported.

oow17 larry ellison
Larry Ellison, CTO and co-founder, Oracle.

It seems Oracle can’t get a break from Wall Street when it comes to cloud revenues as the firm faced accusations of obfuscation around its cloud v on prem numbers yesterday.

Co-CEO Mark Hurd called it a “nothing burger”, but analysts were agitated that the formal earnings statement release for Oracle’s Q4 didn’t break out the cloud business as before.

Coming off Chief Technology Officer Larry Ellison’s previous comments about the firm’s Bring Your Own Licence (BYOL) slowing cloud transition rates, the absence of a figure in the press release seemed to be all it took for an outbreak of conspiracy thinking.

In fact, as co-CEO Safra Catz pointed out, the cloud revenue number was cited on the analyst conference call as $1.7 billion:

Right where we said we’d be. No hiding.

Overall Q4 revenue was $11.3 billion, up one percent year-on year and ahead of expectations. Non-GAAP operating income was up 4% to $5.3 billion. For the full year, total revenues were up 3% to $39.9 billion, with cloud services and licence support making up $26.3 billion.

Oracle argues that customers want more flexible licensing options and has amended its reporting to reflect that. So, the official earnings statement records combined cloud services and licensing support revenue of $6.8 billion, up 8% year-on-year, and cloud and on prem licence revenue of $2.5 billion, down 5% year-on-year.

Catz picked up on the BYOL argument that Ellison made in a previous call:

Some of our customers are buying new licenses and immediately deploying them in the cloud. In fact, our largest license sale in the quarter was a cloudlicence. Other customers, like AT&T, are moving the existing licences they own to the cloud while continuing to pay support. Support for licences that have been moved to the cloud is cloud support.

As a result, our new licence revenue is now a combination of new cloud licence and new on-premise licences. Our support revenue is now a combination of cloud licence support revenue and on-premise licence support revenue.

To reflect these changes in our business, we have now labeled new software licences as cloud licence and on-premise license, and we’ve combined cloud SaaS plus cloud PaaS and IaaS plus software licence updates and product support into cloud services and licence support.

It’s a necessary change, she argued:

To say it another way, customers are entering into large database contracts where some of those database licences are to be deployed on-premise, while other database licences are used in the cloud. Previously, all of those licences and its related support revenue would have been counted entirely as on-premise, which clearly it isn’t. In addition, customers that are in the process of moving their existing database licences to the cloud previously had all of their support revenue counted as on-premise. Again, which it isn’t.

Wins

For his part, Hurd picked up on cloud wins for Q4, citing full year revenue for ERP and HCM of $2.2 billion. For ERP, new logos included Intel, Johnson & Johnson, Kohl’s Department Stores and Facebook. For HCM - where he said “every win is versus Workday - full stop!” - the list includes Toyota Motor, Time Inc and Ingersoll Rand. And for platform, he pointed to AT&T which is:

moving thousands of terabytes of data to the Cloud. We have begun to migrate thousands of these databases as we speak. We expect within the fiscal year to have the AT&T data centers all connected to the Oracle Cloud, migrating this massive dataset.

Ellison added:

They’re an example of one of our largest customers that really has an intent to move the majority of their Oracle data into the cloud...AT&T is unusual because it has so many large Oracle databases. But many of our other customers, now that we have BYOL, can move their Oracle database licence from on-premise into our cloud and they just pay basically for the incremental infrastructure cost and they continue paying support on what becomes a cloud licence. That’s a very attractive value proposition for our customers, and we see large numbers of our largest customers very interested in beginning that migration process.

As for the Automous Database which came out on general release in April, that’s not yet showing up in the numbers, but Hurd says it’s case of early days:

We’re in the law of small numbers here, relative to the entire company, that have tremendous upside. But the key thing for us has been getting out products in the market.

Ellison noted that while AT&T has made a commitment to move everything in “a relatively short term”, other customers are inevitably going to take a less rapid approach:

They are buying additional options for their existing licences so they can move into the cloudand take advantage of autonomous services...you want to move 10% of your databases from on-premise into the cloud and you want to use the Autonomous Database. Well, the Autonomous Database requires that you have the multi-tenant option and the Real Application Cluster option. So, you might have some database licences, but you might not have licensed those options.

So you go ahead and enter into a ULA or PULA, one of these large licence agreements. You add these additional options and maybe additional database licences. And then when you have those additional options, that makes it possible for you to take advantage of the Autonomous Database services. But if you don’t want to use the autonomous services, you can still move your database into our cloud. You just don’t get the autonomous features.

The majority of interest is coming from the installed base, he added:

They’re reusing their existing licences. They’re buying additional options. They’re moving it to the Autonomous Database in the Oracle Cloud.

But there are new workloads as well:

Don’t get me wrong. The new workloads are very important to us. There are lots of cool start-ups and we’re going after those aggressively and we’re getting a lot of those. A lot of our new customers in the cloud are not existing Oracle customers, so obviously, those are new workloads, and we’re getting a lot of those.

My take

A textbook example of ‘scaring the horses’ with the changes to the reporting model making Wall Street nervous and looking for problems. While Oracle argues that the new reporting is a more accurate reflection of how the business is operating, clearly there were market watchers who got jittery about the shift - and any paranoia around transparency is going to be reflected in a share slide. While it seems that cloud growth has slowed - and that shouldn’t come as a surprise to investors - the direction of travel is still upwards. Oracle’s become used to playing a long game in the cloud, which is just as well it seems.

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