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.
Happy New Year to all of you reading this and, as Steve Gillmor might say, all of you who are not.
2018 is poised to be a busy year. I am off to San Francisco this week and next. Salesforce’s annual analyst kick-off, a day of briefings and 1:1 discussions designed to inform folks like me as well as to solicit advice happens on Thursday. Past Salesforce events like this have been eye-openers because they expose the theory and motivations for new product introductions and provide focus for several years out. The crew at Salesforce is exceptionally well versed in how to carry this kind of thing off. For starters, they bring out technologists and executives we don’t often hear from or about. Second, they open the kimono a fair bit so what I learn might stay under NDA for a while. So safe to say that even if the temperature in Boston hadn’t been flirting with absolute zero for the last couple of weeks, I’d still be looking forward to the event.
Just to show how competitive it is in CRM and cloud computing these days, Oracle is not wasting time either. I will attend their analyst kick-off the following week. It will be a very different but still illuminating event because they have a lot to say about positioning their IaaS, PaaS, and SaaS solutions in the modern marketplace. Oracle’s recent earnings jumps show the company is once again a powerful competitor at the leading edge of a new part of the industry. Oracle’s big question/issue will be how they intend to encourage their installed base to begin the Herculean effort of moving to the cloud. Hint: favorable pricing won’t get the job done. So as much as I want to hear more about the autonomous database, self-patching, advanced security and all the rest of the technology, I’ll also be interested in understanding their perceived path to market. Two things you can be sure of is that Oracle has some of the brightest minds in the business and they don’t like failure.
We’ll talk. Watch this space or email me.
Financial analysts are in a small funk because Oracle’s earnings were not as spectacular as they’d have liked. Actually, the revenue numbers were fine; they beat the street estimates of $9.57 billion for the just completed Q2 2018 with revenues of $9.63 billion. The cause of the consternation was a relatively weak cloud growth rate of “only” 44 percent after posting 51 percent growth in the prior quarter. That’s a downward trend and thus the consternation. What explains this?
Let’s focus on human nature. Financial analysts look for eye-pleasing graphics and numbers that tell wonderful stories of increase. But the reality is always more complicated. Orders don’t ship, customer CTOs get cold feet, CEOs find new bright and shiny objects to pursue. Stuff happens. As a result, often a vendor’s numbers don’t’ look as impressive as we’d like.
One specific area of concern for Oracle has been the speed at which the market is adopting its IaaS and PaaS (infrastructure and platform) product lines. The SaaS line seems to be good. Oracle sold $1.1 billion of SaaS in Q2 making it one of the biggest SaaS companies on the planet. But it’s still struggling with infrastructure and platform which combined brought in “only” $396 million in the quarter.
The SaaS business seems to be new deals won the old fashion way. But it takes more effort to grow the other two because much of the increase is logically expected to come from Oracle’s customer base. Analysts are expecting existing customers to swarm in to the new offerings but they seem to be taking their time. The maxim, if it ain’t broke, don’t fix it comes to mind.
Most enterprises have a huge investment in hardware and software, which they are naturally reluctant to discard. So while Oracle’s offer to let them migrate their existing licenses to the cloud in a program called BYOL or bring your own license, that offer is not sweet enough for many businesses with gear they’re still writing off.
At this rate it will take more than the efficiencies from better infrastructure to motivate many businesses to move, hence the disappointing numbers. But to be a bit more realistic, customers are moving to the cloud—$396 million is far from nothing. But it’s going to take more time than the optimists thought to get the migration moving at a faster clip.
At this point there are many things Oracle can do. First, it should count and publish the numbers of businesses coming to their infrastructure. This will likely represent customers gaining a toehold in the cloud. They’ll bring one application or department to the cloud as an experiment and Oracle should pay attention to this because it’s one sure method of growth.
Even if the revenue numbers are small the absolute number of businesses going to the cloud, even if only partially, will strongly suggest future acceleration. For all we know such information is already embedded in the $396 million Oracle already reported. Second, Oracle can sell platform. They do this already but perhaps some effort more squarely aimed at the small developer groups that just need a sandbox. That’s where early growth often comes from. Those groups are often oriented to Microsoft products running on AWS so the strategy works well in two directions. Lastly, when all else fails, the financial analysts could always try being a bit more patient.
My 2 bits
Moving to the cloud is an arduous event for any company. It calls for managers to tinker with the secret sauce, something they loathe. So it’s no surprise to me that moving is a slow process and that despite having all of the bells and whistles ready to go, Oracle is still in early market hurry up and wait mode. It can’t be helped—no vendor can expect to sell anything until it produces the whole product. Oracle CEO Mark Hurd is famous for saying they’ve built a skyscraper but couldn’t start renting units until the building was finished. That’s the time when financial backers begin asking about revenues.
But it takes more time than we care to admit to make a cloud. Oracle is showing some promising signs of early adoption but the situation still calls for patience.
Patience? What’s that?
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.