There are few better ways to take the measure of enterprise software buyers' moods than by examining Oracle's fourth-quarter results, which were released this week. Q4 is always Oracle's biggest quarter of the year, and all eyes were on what numbers it would post for cloud revenue.
Put simply, it was a blowout, with cloud revenue up 58 percent year-over-year to $1.4 billion. Within that total, SaaS was up 67 percent to $964 million while PaaS and IaaS revenues, which Oracle is now counting together, were $397 million. For the full year, cloud revenue rose 60 percent to $4.6 billion.
The results shot Oracle's stock up dramatically, lifted its market capitalization to north of $200 billion, and had executives in a even more positive mood than usual during the earnings conference call. Here are some of the key takeaways from the call and quarter.
In the margins: Oracle's gross margin for SaaS in the quarter was 65 percent, up from 54 percent last year. The company hopes to reach gross margins of 80 percent on SaaS over time. Meanwhile, the gross margin for PaaS and IaaS fell to 47 percent from 54 percent, an outcome Oracle attributes to investments in data center buildouts.
On-premises stability: While on-premises software revenue was flat at $7.5 billion, new software license sales fell 4 percent to $2.6 billion. Oracle made up the difference with a 3 percent rise in maintenance revenue, which was $4.9 billion. That result reflects "high attach and renewal rates" on support contracts, Oracle said—but it could also partly reflect revenue gained through license audit activities. Maintenance remains a highly profitable venture for Oracle—and all software vendors, for that matter—and the company is keen to preserve it as much as possible, even as more customers buy into cloud.
Chasing Salesforce: Oracle is going to surpass Salesforce as the number one SaaS vendor, CTO and executive chairman Larry Ellison said on the call. That's because it has a more diverse SaaS portolio, Ellison added:
The reason we are confident that we will pass Salesforce is because we have a three-fold SaaS application suites for ERP, for HCM and for CRM including financials, procurement, supply chain, manufacturing, human resources, payroll, marketing, sales and service. Salesforce in contrast only competes in three of these nine market areas.
It's not always clear how customers benefit from this sort of chest-thumping, but if the competition continues to heat up between Salesforce and Oracle, they could win out through better pricing and bundling options, as well as heightened innovation. Time will tell.
Cloud ERP crushing it: Oracle's cloud ERP revenue was up 156 percent in the quarter, a figure that does not include sales from NetSuite, CEO Mark Hurd said. (Netsuite is being positioned as Oracle's SMB option for cloud ERP, while its Fusion suite is aimed at large enterprises.)
Oracle picked up 868 cloud ERP customers in the quarter. Among others, Oracle struck cloud ERP deals with Allianz, BNP Paribas, GE, the Kraft Heinz Corporation, Juniper, MetLife, Minerals Technology, Motorola, NCR, Netflix, Newell Rubbermaid, Orange, Pearson, Sinclair Broadcast Group, Textron, the University of Maryland, Vanderbilt University and Volkswagen, he added.
More tellingly, two-thirds of cloud ERP customers in the quarter had never purchased an Oracle ERP system before, Hurd said. That suggests Oracle has assembled a strong sales organization, is successfully raising awareness outside its installed base, and most importantly is able to put viable cloud ERP solutions in front of a diverse set of companies and organizations.
Sales switchup: Hurd responded to recent reports that Oracle was planning significant layoffs in its sales force once the quarter closed. (See the Register's report here.) He denied the idea of layoffs, while acknowledging Oracle has been making some changes:
This is all just not true. So, is our sales force shrinking? No. Do we change things in our sales force? Sure. Is there any major reorg going on? No. But remember, our competitors change. We have some very simple principles how we run the sales force. We lineup our sales force by product. We line them up by buyer and by competitor. And that market tends – those dynamics can change or competitors change we have noted over the past several years. .. Second, we are building out, as we have told you over the past couple of years, big hubs that are doing a lot of our selling. And so we have the byproduct of that is that our sales force is actually increasing in numbers, but our cost per salesperson is actually declining.
Cranking up the Cloud Machine: In May, Oracle announced an agreement with longtime customer AT&T that will, among other things, see the telco migrate thousands of its internal databases to Oracle's IaaS and PaaS. While the press release issued at the time suggested AT&T would use Oracle's public cloud, on the call Hurd revealed that the agreement will involve Oracle's Cloud Machine appliance, which replicates its PaaS and IaaS inside a customer's own data center:
[T]hey have several hundred large databases that have 70%, 75% of all of their company’s data. They have badly wanted to get the benefits of cloud, provisioning, a lot of provisioning and all the new features that come with product modernization, consolidation of that infrastructure, yet in many cases they have got regulatory pressures on what they can put in the public cloud and what they can’t. ... we take our Oracle cloud machine and we are able now to do all of that with them on their premise and give them all the benefits of the cloud, we manage, we patch, we basically run the cloud for them.
Oracle sold more 100 Cloud Machines in the quarter, and wants to ultimately deliver them to tens of thousands of customers. Hurd didn't provide any context for the quarter's results on Cloud Machine, which was launched in March 2016, such as the percentage increase or decrease in unit sales. Constellation believes that while data sovereignty and regulatory guidelines remain strong drivers for private cloud, Cloud Machine may remain of interest mostly to all-in Red Stack shops for some time to come.
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