Oracle is in a legitimate exponential growth phase and not for the first time in its long career. Like a startup it is growing much faster than the organic growth rate of the economy or its primary market because it has some new products that are highly desirable including cloud offerings and a unique fully autonomous database. It is also growing quarter by quarter and year over year—this is not a one-time thing. But unlike a typical startup that must claw and fight for every new customer, Oracle has the opportunity to sell its new products into an existing customer base that is hungry for improvements in their price-performance ratios.
Yesterday co-CEO’s Safra Catz and Mark Hurd plus Chairman and CTO Larry Ellison broke down the numbers for the just completed quarter and they were impressive with most of the growth coming from cloud computing including infrastructure, applications and platform services.
Total cloud and conventional software revenues were $8 billion, and Catz gave a blizzard of other positive numbers including,
Cloud staff revenue for the quarter was $1.2 billion, up 21% on a GAAP basis from last year in constant currency with — on non GAAP basis with Fusion Cloud revenues up 52% in constant currency. Cloud PaaS and IaaS revenues for the quarter were $416 million, up 24% from last year in constant currency. Cloud PaaS and IaaS revenue, excluding legacy posting services, saw growth of 49% in constant currency and 56% in U.S dollars. As legacy hosting services become smaller part of total PaaS and IaaS, the underlying growth of PaaS and next generation IaaS will be more visible.
Here are my observations.
First, only about 15 percent of the customer base has even begun moving to the cloud products meaning that more good news will likely be coming in future quarters and for some time. Much of the momentum comes from net new sales.
Second, the revenue gains are likely to accelerate as the company builds out its infrastructure support. Oracle announced earlier this year a drive to deploy xxx new data centers to support its Infrastructure as a Service (IaaS) initiative. Without those data centers being deployed and ubiquitous it can’t sell much infrastructure though even there it generated $416 million last quarter gaining 24 percent year over year.
But more is to come, and, now, infrastructure is a potential throttle. For instance, as the company will soon be able to service more customers with the same hardware or as Hurd put it,
As we fully deploy database multi-tenancy in our staff, let’s say. We double our capacity without spending one penny on hardware. We can help twice as many customers, twice as many transactions, twice as many users without spending one dollar.
Third, the new edition of the core database product, which is fully autonomous, is now generally available offering a level of efficiency and security unparalleled in the industry. On the call Ellison said there’s more to come.
Over the next few months, we expect to deliver autonomous analytics, autonomous mobility, autonomous application development and autonomous integration services.
If anything, Ellison may be underselling the benefits of the autonomous database when he talks about the labor-saving aspects as money savers as when he said,
Our highly automated suite of autonomous PaaS services reduces cost by reducing human labor and improves reliability and security by reducing human error.
For enterprise users, labor is cheap and although reducing human error is important the speed with which the autonomous database acts to self-correct may be the more significant benefit. Ellison revealed at OpenWorld that his customers can take upwards of 13 months to install database patches leaving their systems unnecessarily exposed for that time. The autonomous database self-patches meaning that users can install fixes much faster. Almost any cost associated with upgrading to the new database when compared to reputational hits and law suits over compromised data are insignificant in comparison.
Fourth Oracle is buying back shares and has a war chest of $70 billion. In the last quarter Catz said the company bought back $4 billion in shares, a process that is ongoing. The implication is that revenue and earnings numbers that are measured on a per share basis will likely improve simply because there are fewer shares outstanding.
Also, with so much cash on hand Oracle can pay for important things like further IaaS deployment and marketing to further push its products into the marketplace.
The notable difference between Oracle and a startup is that the company can afford to be its own venture capitalist. Another difference is that in addition to being able to attract net new customers, it has a huge installed base to bring current. They’ve previously said the process could take 10 years or more so it is still early days.
Unlike many other players in the market, Oracle has seen the need for greater security measures to combat the threats in the world today. Oracle is the logical player to deal with security since so many of the world’s applications are based on its technology infrastructure.
It will take some time before the technology diffuses through the industry and IT becomes a more secure environment. But it won’t take ten years. Plenty of companies will need to upgrade their applications independently of what Oracle does now that new tools are available. As it makes this turn to cloud computing Oracle is laying the foundations for a global information utility that can address today’s challenges.
But Oracle can’t do the job alone. Current news demonstrates that the Internet and social networks are no better at security than a screen door against a winter gale. The information utility will need more encryption and professionalization of its user class. In addition to having proficiency with the technology, users need to be easily identified, perhaps through license numbers, and certified in the ethical use of the technology.
You might not realize it but a plumber has to get a permit before working on your natural gas feed. It’s not an onerous process if the individual can demonstrate (via his or her license) the basic competence to do the job. We’re getting to that point in IT right now.
Oracle reports its earnings on Thursday, December 14, after the markets close and trying to guess how the company did in its second fiscal quarter has become a parlor game. Seeking Alpha, an investment newsletter, has been making observations ahead to the announcement trying to inform its subscribers about what to expect. They are not alone, financial analysts do this. But the thing that amazes me is how little the financial analysts understand the shift taking place both at Oracle and throughout the industry.
Lots of people seem to be clucking over how much the company has invested—$22+ billion or just under 15 percent of all revenues over the last four years. At the same time Seeking Alpha notes that annual revenues have been flat as a medieval map of the world fir quite a while—stuck at about $38 billion.
The good news, they say, is that cloud revenues have grown at 12.36 percent per quarter while on-premise revenue declined at 1 percent. Meanwhile hardware sales over the last 2 quarters have dropped about 2.5 percent per quarter for the last 2 years. All this despite some world beating computing and storage services. You can find all of the stats here.
Now, it’s expected that the finance guys are always going to want to know about profits and growth and any big time capitalist manager is going to both understand this need and desire to meet expectations. As a technology analyst, I am not either guy and my capitalist instincts are in check whenever I look at a situation where a new industry and product lines are being developed as is the case here.
Consider first what it will take for Oracle to begin making real money on its investment in the cloud. First step in any such situation is to diffuse the new or disruptive innovation to the marketplace. For Cable TV, telephone, and electricity it took decades of stringing wires and opening offices to reach something close to market saturation. Oracle or any cloud provider is piggy-backing on earlier investments in the Internet so scratch that.
But add in some huge investments in data centers around the world that support Oracle’s cloud. Also add the cost of R&D and acquisitions that produce the actual apps that enterprises need and you can easily see how the company spent billions. At the same time, the crowd of users Oracle wants to attract is still in the sales funnel. Oracle’s more than 425,000 customers are primarily on-premise users and they are conscious of the cloud move and many are therefore planning their shifts; they are not investing in a lot more on-premise products as the numbers bear out.
So Oracle is in a classic squeeze having paid out all or a very substantial part of the investment and they’re still waiting for the returns. This understandably makes the finance guys somewhat concerned and although it’s their job to seek profits they don’t show a great deal of sophistication in understanding the major trend that moving to the cloud drives.
Seeking Alpha expects graphs of Oracle’s cloud and on-prem businesses revenues to intersect in 2020. That means continued slow downward trending for the on-premise business and very nice up ticking for the cloud. As a long-term viewer it looks pretty good to me. But I can certainly understand how widows and orphans might not.