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.
Announcements may be playing the role usually reserved for M&A activity in the CRM world right now. Generally a company purchases another when it wants to capture the benefits of another business’ R&D or established market base. But at the moment it appears that the desirable partners are too big to swallow and the result is more partnering between the big guys and the really big guys. Salesforce has been pursuing this strategy for most of the last year with Amazon, Google, and IBM. This says a lot about the state of the marketplace on several fronts.
First Salesforce and Amazon announced a partnership in which Amazon and its AWS infrastructure service would become Salesforce’s strategic infrastructure partner when Salesforce absolutely had to deploy a data center in a foreign land.
This makes perfect sense. As I have often said, it makes no business sense to build (in this case a datacenter) when you can purchase the solution at a reasonable price on the open market. As a competitive issue, Salesforce’s choice of Amazon is a direct challenge to Oracle because it offers a safe haven enabling Salesforce to diversify its partner portfolio while keeping Oracle and Microsoft at arms length. Given the rumors of salesforce being acquired by a big tech firm over the last few years, this seems a good way to help preserve its independence.
Much the same can be said of the alliance with Google. This is primarily a play for more SMB business and it’s a good one. Salesforce and Google announced their partnership around G Suite, Google’s free office apps. A while ago Salesforce and Microsoft created an integration with Outlook effectively making Outlook another UI for Salesforce. This parallels Microsoft’s own integration with its CRM and Outlook. So this partly neutralizes Outlook as a differentiator in any CRM decision.
Google integration gives Salesforce access to all those G Suite users who need CRM, especially in the SMB space. It also gives Salesforce another way to compete against Microsoft CRM. But, of course, they didn’t stop there. Salesforce also now has an integration with Google Hangouts too, an effective counter to Skype which is now owned by Microsoft.
Away from the SMB space in the Enterprise market Salesforce also forged a relationship with Google Analytics. Not that they need more analytics but the two partners have developed plausible processes that use Google Analytics to surface macro trends and Salesforce Einstein to go the last mile, a model that works with IBM too.
Last week Salesforce and IBM got closer with Salesforce naming IBM a preferred cloud services provider and IBM calling Salesforce its preferred customer engagement platform for sales and service. The agreement leverages IBM’s Watson analytics and its cloud as well as Salesforce Quip (more office software) and Service Cloud Einstein.
In all of this we can see that Salesforce is working to maintain its independence by linking with anything that can enhance its CRM and make it less desirable as an acquisition target. But of greater importance, it’s these relationships and others like them that will help Salesforce reach its goal of $20 billion in revenues in a few years. When your revenue needs are this big, you need to leverage the market penetration of similar companies. And while all of the companies named are bigger than Salesforce, they each need the bragging rights of working with the most popular CRM in the world.
Another question in all this is what’s happening with M&A activity, which seems to lull while partnerships blossom. The merger market is notorious for running hot and cold and right now it seems tepid, like there’s more opportunity for large companies like Salesforce crafting relationships with bigger partners. It’s not clear if this means there are few attractive acquisitions out there or simply that the times require different approaches to the market.
More than once in talks since Dreamforce in November Marc Benioff has used the logic, my enemy’s enemy is my friend. This logic is being played out in the partnerships his company is spawning. On one level it’s just smart business but in the back of my mind, I see the information utility of the 21st century forming. It will resemble the current electric utility in that no single provider will dominate and a high degree of interoperability will be needed. Standards like 120 volt and 60 Hertz electricity are what give us the impression of a continental electric utility grid but in reality, the grid is made up of smaller vendors adhering to the standards.
Likewise there’s no single vendor capable of dominating the information utility market and standards will be vital. That’s why it’s so important when a company like Salesforce announces partnerships. These incremental agreements have more significance that the press releases might allude to. They are steps on the road to something bigger.
Oracle’s race to the cloud has offered multiple successes to its investors and some disappointment as well. No transition of this magnitude can be expected to run like clockwork but the difference between revenues for Oracle’s SaaS apps for last quarter, $1.1 billion, and those for its cloud infrastructure, IaaS, at $396 million, should at least get you thinking.
There’s a good explanation for this and it’s surprising that the company hasn’t done more to provide guidance to its financial analysts but then again, the purpose of reporting your finances is just that. There’s no room for anything that can look like an excuse. That’s too bad because it can lead people to wrong conclusions.
I spent a day at Oracle last week receiving a briefing on the company’s roadmap for the year ahead. While some of the information was presented under nondisclosure, I can say that the briefing ran the gamut and went into areas that I am not expert at such as serverless apps, bare metal servers, and the new autonomous database. But I am coming up to speed as fast as I can.
The company’s cloud architecture and IaaS offering gave me one surprise. Oracle intends to roll out 13 distinct regions for IaaS connected by a very high-speed backbone. Each region is highly modularized with triple redundancy and can easily scale as demand increases. All of this is very important because, I believe, this is not simply about cloud computing but about another disruptive innovation we will all face in the next few years.
The disruption is the formation of an information utility and it’s all but certain that no single corporate entity will own all of it. As big as Oracle’s plans are, Salesforce has similar ideas and while we’re at it so do Microsoft, IBM, SAP, Amazon, and a number of hosting services too numerous to mention. Yes, there will be consolidation and those too numerous vendors will likely be scooped up first.
But back to Oracle—$396 million is a lot of money but small change compared to its SaaS number and small compared with the company’s aspirations. The logical conclusion that many finance people drew from that number is that Oracle has a “problem” or that it’s not executing well in PaaS and IaaS, but really? Not exactly.
According to Oracle President of Product Development, Thomas Kurian, who led off the analyst briefing, only 3 of the 13 regions have been deployed so far. More will hit their markets this year but the rollout takes time and we’ll still be talking about it next year.
Not having the regions up and running means that in some strategic places, the company doesn’t have IaaS to sell. So the $396 million is a look into a still very much expanding world. Just for fun you could say that 3 of 13 is just under a quarter of the deployment. If the other regions were running as well as the three in place the IaaS and PaaS numbers might easily be four times the reported revenue number. It’s unclear if that’s good or not since we don’t know a lot such as capacity and utilization of the existing regions, but still…
So for now, the revenue picture remains lumpy but now we have more explanation and color for the results. Hopefully this also gives financial analysts something to consider as they try to figure out what the numbers mean to investors. The rest of the market seems to expect a bright future for Oracle as its stock continues to do well despite the lumpy earnings.
There’s also discussion about renewed competition in the database market circulating after a story in The Information suggested that companies like Amazon and Salesforce were building competitive database products and would depart Oracle in the near future. I don’t agree. If for nothing else, building a database is a big effort and one that detracts mightily from a company’s primary business interests. It is dilutive of effort and cannibalistic of resources. For these reasons it should only be taken on as a last resort. That’s the way any business should look at any effort to self-source rather than go to the marketplace for needed resources.
On top of that I spoke with Parker Harris CTO and co-founder of Salesforce recently and when asked about the story he said, “We have a good relationship with Oracle and we use a ton of it. We are not getting rid of the Oracle database. We are working on technologies that add capabilities around the edges, like sandboxes. We will have SQL Server and Oracle for a long time.”
No surprises there. It’s been true for a long time that in these big markets sometimes we compete and sometimes we cooperate. In the era of the Information Utility I expect a lot more co-opetition.
The software platform is likely to be the new battleground in enterprise software. This is not to say that analytics and security are not important but they are being handled in different ways. Security is being handled in ways that address both hardware and software vulnerabilities but these things aren’t what customers or consumers spend their days thinking about. While everyone wants security, few know enough about it and the attitude is that security is someone else’s job. So both of these topics will be dealt with but they aren’t likely to be competitive differentiators, at least not yet.
But platforms affect more people and importantly they are key to making and saving money, topics the C-suite cares deeply about. Some of them might not know data from database but they all know profit and loss.
The software platform can be directly linked to making and saving money, which is why it is such a potent potential differentiator. We live in an era of commoditization. It’s hard to find true differentiation among competing products, which naturally leads to price wars. More than that, the pace of new product and new category introduction has declined precipitously over the last decade meaning that vendors find themselves in zero-sum competitions in which winning new business means poaching someone else’s customer.
So if there’s a lack of strategic differentiation there’s a load of tactical opportunities. Without strategic differentiation we face a market in which the first to react often wins the prize. And since so much of business is undergirded by information technology, the most adaptable technology—embodied in a platform—is the one most likely to help a vendor either make or save money. So we have the platform but where do platform wars come in.
A generation ago we faced a similar situation in which the answer was not the platform but the whole product. However, in retrospect they are the same. Whole product refers to all of the things a vendor in a mature market hangs to attract customers aside from the core product. Whole product consists of not only the core but the policies and procedures, financing and documentation and many other things.
The need for whole product was a driver of CRM’s evolution. Systems were imagined and built to capture customer feedback and to support employees striving to satisfy them. But CRM was an expensive proposition, especially in customer service, which required agents initially. It’s one reason so much energy has gone into developing indirect and self-service support.
Today’s problem is slightly different in that vendors all more or less recognize a need to alter their processes on the fly. It’s no longer enough to offer the support a vendor feels is right even in multiple channels. We must now support and service customers as they wish to be treated and that dimension is always changing. Such change happens at the platform level.
In this scenario it stands to reason that a vendor with a superior platform will be likely to succeed more or more easily in tight competition. But that’s not the end of the story. You can’t logically run a business on a platform unless your people know how to use it and that requires training—ongoing training.
All of this came into sharp relief last week as I attended the annual analyst kick-off event sponsored by Salesforce. The company has been developing its platform for a long time and just as importantly over the last 2-3 years it has brought forth an online training utility that develops platform skills in the rank and file. Giving customers a usable and powerful platform is the future in my mind. Interestingly, I don’t think the messaging has come together fully.
There’s more substance than shine to the mix, an enviable situation for any vendor. In detail there’s a fine platform and a very useful training utility in Trailhead. Also, there is an extensive list of plug and play platform based applications on the AppExchange. Think of it as the three-legged stool we’ll all need in the future.
What’s somewhat missing in most quarters is the realization and effective communication that this stuff is no longer optional, that business supported by platform fundamentals is what successful vendors will be using for the foreseeable future.
Other vendors, for instance Amazon with AWS and some others, see a different need and work to meet it. But primarily providing cloud infrastructure only addresses half of the challenge and amounts to saving money. That’s a great thing but when faced with making or saving money, 10 out of 9 (I said that right) executives who are given a choice will opt for making in money over simply saving it.
That’s why platform is so important today and why I think the decision point for many business leaders in the next year or two will be over which platform to select. It’s a choice that will have far reaching consequences because platform is foundational and not easily changed.
So welcome to platform wars. It will be a thrilling time if you are a software vendor and you have one. Other vendors, not so much.