Some analysts still don’t get it
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.