The race to the $10 billion cloud - Oracle lays down the gauntlet to Salesforce

Stuart Lauchlan Profile picture for user slauchlan June 16, 2016
Summary:
Who's going to be first to be a $10 billion cloud business? It doesn't really matter to the customer, but Oracle's Larry Ellison has made it his objective. Elsewhere, numbers are flat, but keeping Wall Street happy.

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The race to $10 billion

The first company to boast $10 billion in cloud revenues.

The casual listener to Oracle’s quarterly conference call might well have paused to double-check that he or she hadn’t inadvertently stumbled across a Salesforce call instead. For of course that goal of a $10 billion run rate has long been Salesforce CEO Marc Benioff’s stated intent.

But, in the latest gauntlet to be thrown down, his old boss and mentor Larry Ellison is provocatively suggesting that Oracle is going to beat him to it. Or as he put it:

We need to be number one.

Ellison argued:

We think we have a fighting chance to be the first SaaS company to make it to $10 billion in revenue. We’re the second largest SaaS company in the world now and we think we can be the largest SaaS company. By the time we hit $10 billion, we’re going to be the first one there.

All good saber-rattling fun and an extension to the Oracle v Salesforce/Ellison v Benioff narrative, but what’s the reality underpinning such boasts? And what about the elephant in the room? - the lawsuit from a former employee alleging “improper and suspect” accounting around the cloud business.

Certainly Oracle is claiming some impressive growth rates, starting of course from a lower cloud base in the first instance. For the fourth quarter, the firm reported $2.2 billion in Software as a Service (SaaS) and Platform as a Service (PaaS) revenue, under one third of Salesforce’s total revenues. Infrastructure as a Service (IaaS) comes in at an 8% growth rate.

But Oracle’s boasting a year-on-year overall “cloud, SaaS and PaaS” growth rate of 67%, compared to Salesforce’s 24%, with Oracle CEO Safra Catz predicting that will bump up as high as 80% for the next fiscal year:

As the business grows, the growth rates are continuing to increase. In our SaaS/PaaS business, we reported 20% growth in fiscal year 2014, 34% in fiscal year 2015, and now 52% in fiscal year 2016, and not to get ahead of myself, but we expect to see even higher SaaS/PaaS growth this year.

And those accounting allegations? Catz chose to head those off from the outset of the conference call, insisting up front:

As regard to our cloud revenue accounting, we have reviewed it carefully and are completely confident that it is a 100% accurate and if anything slightly conservative.

Clearly that’s not going to put an end to the matter, or indeed to the scuttlebutt, but it was enough to deter Wall Street’s finest from digging any deeper on this occasion!

Beyond the cloud

Away from the cloud, the numbers make for less happy reading.

Total on-premise software revenues  in Q4 were $7.6 billion. Most of that is coming from a maintenance revenue stream, with software updates and product support revenues up 4% year-on-year to hit $4.8 billion, while new software licenses were down 10% to $2.8 billion. Total hardware revenues, including support, were down 7% to $1.3 billion. Catz said:

Our SaaS and PaaS business has now grown to the point that we expect the dollar growth in SaaS/PaaS revenue will exceed the dollar declines in new software license in fiscal year 2017 and beyond. But more importantly, when you look at our software business, we have an on-premise business basically growing a bit or flattish and the cloud business layering on top of that growing very fast and growing as a percentage of the software business.

So, back to the cloud and it was Salesforce that Ellison had firmly in his sights - Workday only got one mention, while SAP was ignored completely - saying:

Salesforce, which is the largest SaaS company, is really focused on sales automation and some of the other customer experience aspects. They just bought Demandware. They are making acquisitions. They are growing their business, but they are in the customer experience sales area.

They don’t compete in the largest category, which is ERP, also not HCM, again supply chain and manufacturing again and we think that gives us a huge advantage that our footprint is wider. And some of these mid-market companies can simply get in an all-Oracle footprint, run their entire enterprise in the cloud on Oracle. That is something that Salesforce can’t offer and we think that’s going to service [us] very well and allow us to keep these very high growth rates, while we go for that to be first at $10 billion.

OK, so in SaaS and PaaS, the objective is to be number one. On IaaS, it might be presumed the main objective is to kick start growth rates, at least up into double figure, in a sector dominated by Amazon. CEO Mark Hurd took a stab at what's been a slow-starting market for Oracle and laying down some reasons for customers not to choose Amazon:

Well, because we handle the Oracle database much better than Amazon does, we can run very large Oracle databases. We run at full power that way. We just do a better job. I mean, this is not the place for me to give you a technical proof, but we do a better job than they do on Oracle. They run Oracle databases, but we do a much better job. We run it faster, more reliable and more securely.

If I’ve got the database in an Oracle data center in the Oracle cloud, it makes sense for me to put the application at a computer right next to that. That’s higher performance, much lower cost, because I’m not moving all those data in and out of an Amazon data center and in and out of an Oracle data center. Those things are going to be tend to be co-located.

So we think we have some built in advantages being a strong player in SaaS and a strong player in PaaS and making it very [easy for] all of the customers who want to get their infrastructure as a service or their related infrastructure as a service from the same cloud supplier in the same data center.

My take

Heading off the accounting allegations by taking the lead was a savvy move by Catz, particularly when the rest of the pitch was built around growth rate predictions for the cloud business. As noted above, that’s not going to be the last we hear about this by any manner of means, but it left the way clear for some vintage Ellison excess around SaaS and PaaS. The IaaS story needs work. More specifically it needs some demonstrable use cases that go beyond 'Because we're better" as a differentiator to Amazon.

The overall picture remains consistent and reflective of the transitioning of the company’s business model. For Q4, revenues were $10.6 billion, down 1% year-on-year, and profits flat at $2.81 billion. while for the full year fiscal 2016, revenues were flat at $37.0 billion, as was profit $8.9 billion. Wall Street’s clearly getting used to this now with the share price up a few percentage points after the results announcement.

As for the race to $10 billion, well, it’s amusing rhetoric, even if not relevant to customers, and we’ll be hearing more about this from both parties if Benioff’s reaction on Twitter is anything to go by:

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