Oracle's Safra Catz - COVID-19 hit deal decision-making in Q4, but the wins were delayed, not lost

Profile picture for user slauchlan By Stuart Lauchlan June 17, 2020
Summary:
COVID-19 took its toll on buying decisions for Oracle, but the pick-up is already being seen, according to CEO Safra Catz, while CTO Larry Ellison flags up his HCM growth confidence.

Ellison
(Larry Ellison - via Oracle )

COVID-19 brought Oracle a high-profile win with Zoom during the last quarter, but the pandemic also hit the wider deal closing pipeline, with Q4 revenues down 6% year-on-year as a result.

Q4 revenue was $10.4 billion with net income down 17% to $3.1 billion. Revenue from the cloud licence and on-premise licence unit fell 22% to $1.96 billion, while cloud services and licence support revenues were $6.8 billion, up 1%. For the full year, revenue declined 1% to $39.1 billion, with net income of $10.1 billion down from $11.08 billion a year ago.

A number of key sectors saw an uptick in decision deferrals, most notably those who have been themselves impacted by the COVID-19 crisis, such as transportation and hospitality. CEO Safra Catz said on the earnings call after the results announcement:

We entered Q4 with an enormous pipeline of transactional business. As the quarter progressed, we saw drop-off in deals, especially in the industries most affected by the pandemic.

The ‘glass refilling’ follow-on to this is that Catz says those prospects who did hit the pause button have begun to re-engage already:

As countries begin reopening their economies, many of these discussions have already resumed. Since these were not losses to competitors, we believe that most of this business will ultimately be booked. 

She’s also confident that more organizations coming out of the current crisis will seek to shift from on premise into more cost-friendly cloud rollouts:

While some customers have deferred projects, we're also rapidly building new pipeline with customers that are moving their on-premise workloads to the cloud. COVID-19 created challenges that forced companies to re-consider how they work in the cloud, including looking to us as an alternative to AWS and Azure. As we engaged with these customers, they found OCI  [Oracle Cloud Infrastructure] was more performant than our competitors, more secure, less expensive and easy to use, making OCI now a serious part of the infrastructure discussions. We are also seeing this on the application side of the business, as many customers entered the pandemic unprepared and are now showing renewed interest in modern cloud applications with mobility, social and machine learning built in.

And she staked a claim that Oracle’s overall business mix bodes well for the post-COVID period:

Our revenue is now clearly in one of three distinct groups: one growing, one stable, and one declining. What I see is that while overall revenue growth has averaged around 1% to 2% over the last few years, underneath, the growing businesses have grown at a 30% compound annual growth rate. The declining businesses averaged almost double-digit decline and our stable businesses were up 1% or 2%. We are now at a point where our growing businesses are now larger than our declining businesses and this favorable shift will inevitably drive revenue acceleration going forward.

The customers who did

In terms of product offerings, Oracle left the quarter with more than 7,100 Fusion ERP customer and 22,000 NetSuite customers. Fusion Cloud Enterprise Resource Planning Suite reported 35% growth in constant currency, while Fusion Cloud Human Capital Management Suite grew by 29%. The HCM growth was flagged up in particular by Oracle CTO Larry Ellison, whose outspoken confidence is clearly undimmed by the pandemic:

We've now seen our Fusion HCM growth rates [rise] as a result of the fact that HCM purchase decisions are now getting bundled with ERP purchase decisions. We've seen our HCM Fusion growth rates surpass Workday's HCM growth rates. We are already by far the biggest cloud ERP player and it looks like we're going to be able to leverage our advantage in ERP and our scale in ERP to also become the biggest cloud HCM player.

He pointed to a number of key HCM customer wins to back up his claim, including:

JPMorgan Chase in this past quarter went live in 100 countries with over 256,000 employees on Oracle Cloud HCM and recruiting. JPMorgan Chase has already moved over 2 million of their recruiting candidates to the new Oracle Cloud recruiting system. Maybe the most interesting one [was] Goldman Sachs. Goldman Sachs initially purchased Workday HCM, but their implementation was not successful. Thereafter, Goldman Sachs acquired Oracle Cloud HCM and they went live a little over a month ago.

Mount Sinai Hospital and the Icahn School of Medicine went live with Oracle Cloud HCM amid the COVID-19 pandemic to support more than 26,000 front line employees with more modern accessible tools that they could use at home….We won Kroger - North America's largest grocery is replacing their SAP system with Fusion HCM. The key enablers that allowed us to win this deal were our capabilities around all of HCM can operate from a smartphone, AI, machine learning integrated into the application, chatbox integrated into HCM, and all of our modern SaaS applications and our Oracle Voice Digital Assistant. 

Other Ellison customer citations included Santander which is consolidating its databases on Oracle's Exadata Cloud @ Customer and adopting the Oracle Autonomous Database; a four year expansion deal with Verizon Business Group, which had previously moved over 25 mission and business critical workloads to the OCI Gen 2 public cloud; and SGS, formerly Societe Generale, which inked a three-year contract to move multiple workloads to OCI Gen 2 public cloud, including a 34,000 user e-business suite application.

And of course the Zoom win was picked out for particular attention as was a second win, with 8x8:

Demand for Zoom services has increased almost 20 times since January. Zoom needed additional cloud capacity immediately. Within hours of the first Oracle deployment, OCI supported hundreds of thousands of simultaneous meeting participants. Usage has continued to ramp where Oracle now supports millions of simultaneous meeting participants. Zoom selected OCI because of our advantages in price, performance, scalability, reliability and cloud security. Every day our Zoom conferences move more than 8 petabytes through the OCI network. That's an extraordinary amount of data. We've been able to scale and help Zoom scale as demand grew.

He added:

I think a bunch of people were shocked in that Zoom picked Oracle.  I think Zoom was shocked also! I think Zoom was shocked when they looked at the results after they moved their application to Oracle and we were faster, much faster and we were much less expensive and we were more secure. 

Surprise was also a keynote at video meeting provider 8x8:

The customer began by moving some services to OCI for performance enhancements. 8x8 was very surprised by the extent of their performance gains by moving part of their system out of AWS and into OCI. They were so surprised by the performance gains they achieved and the cost savings they achieved that they decided to move services out of AWS and into Oracle. Once OCI demonstrated much better performance at a much better price, that sealed the deal for 8x8 and its growing base of 20 million monthly active users.

My take

A recurring theme over the past few years has been how Oracle’s transitioning of its customer base off of on premise solutions into the cloud has impacted on earnings as the revenue balance shifts. Ellison made the same point yesterday:

Our mix is changing, our profitable businesses are getting bigger, our less profitable businesses are getting smaller.

Than along came COVID-19…

From CEO Safra Catz’s not unreasonable point of view, the Q4 numbers need to be judged in the context of the pandemic’s wider impact, arguing:

Our overall business did remarkably well considering the pandemic.

Wall Street’s immediate reaction yesterday wasn’t immediately happy with buying into that thesis, but in reality, how well-founded Catz’ confidence is that organizations will emerge from the current situation with an appetite for more modern tech infrastructure and applications will only been seen in the coming months ahead.