When an industry is being disrupted, the way that cloud computing is upending the technology business today, established companies like Oracle are supposed to hedge their bets and cling to their old ways.
Instead, what was striking about Oracle’s Q4 FY2015 earnings call last week was the unequivocal way Oracle’s top three executives described the company’s cloud computing shift, as well as how fast its customers are adopting Oracle’s broad cloud software, platform, and infrastructure products.
“I would not trade the cloud revenue for the license revenue, as cloud revenues and cloud bookings mean significantly more in revenues and earnings over time,” Oracle CEO Safra Catz said.
Oracle Executive Chairman and CTO Larry Ellison described cloud as “a much better business for us.”
Oracle’s revenue from software-as-a-service and platform-as-a-service products grew 35% in constant currency in Q4 FY2015 (ended May 31), and Oracle forecasts 60% growth in PaaS and SaaS revenue for FY2016.
Adding infrastructure as a service brings total FY2015 cloud revenue to $2.1 billion. That’s still just 5.5% of Oracle’s $38.2 billion total revenue, but Oracle made clear that the cloud is its growth engine.
“We’re doing what you very rarely ever see happen in our industry—we are getting bigger, and our growth rate is expanding,” Oracle CEO Mark Hurd said about the company’s cloud business. “We will be the world’s largest enterprise cloud company.”
Why is Oracle so comfortable with the cloud business model disruption, and why is its cloud business hitting hypergrowth mode at this moment? Here are five key insights from Ellison, Catz, and Hurd during last week’s earnings call:
1. Why is Oracle’s cloud business hitting hypergrowth now?
During the earnings call, Ellison asked this question himself and provided two reasons.
In SaaS, it’s the rapid acceptance of Oracle’s Fusion apps, a suite of enterprise apps rewritten entirely for the cloud over the past decade. Oracle has more than 1,000 Fusion ERP customers, 10 times more than SaaS rival Workday, Ellison said.
“It's between us, Oracle and Workday, in the midmarket and the high end of the cloud ERP market, and we are winning big time,” Ellison said. With the #1 or #2 products in other SaaS categories, including human capital management, sales, service, marketing, and supply chain, Oracle has more SaaS applications than any other enterprise cloud company, he said.
In PaaS, Ellison credits “huge pent-up demand” for the Oracle Database and Java as a service, letting companies move database workloads and Java apps to the cloud “with the push of a button,” Ellison said. “That’s why our PaaS business is growing even faster than our SaaS business.”
Oracle this week will make an even bigger bet on PaaS, announcing a major expansion of its data management, integration, and other cloud services.
2. How can cloud be a ‘much better’ business for Oracle than license and support, which the company was built on?
With cloud software and platforms, Oracle provides more value to a customer—providing software and also running it for the customer—so Oracle gets more revenue from a cloud deal than a license-and-support deal, Ellison said.
But what about the profitability of SaaS and PaaS?
“This is going to shock you,” Ellison said. “It's about the same as license and support. It's stunningly profitable.”
Unlike its cloud rivals,Oracle owns many of the components needed to run a cloud data center, from Oracle Database and Java to its Exadata hardware. Those cost advantages, plus major savings from automation and economies of scale, let Oracle run an app for less than most customers can themselves, while Oracle maintains roughly its historical profit margin on a larger slice of revenue.
Compared with today’s license-and-support model, in a cloud deal “the revenue goes way up. The profits go way up, and the margins are approximately the same,” Ellison said.
Infrastructure as a service, though, remains a lower-margin—though still profitable—business. “You can see what Amazon's profit margin is in its infrastructure as a service,” Ellison said. “We think it can be a profitable business when we get to scale.”
3. How does cloud open new markets for Oracle?
More than 60% of the companies that inked cloud software deals with Oracle in Q4 FY2015 weren’t previously Oracle application customers, Hurd said. In Q3 FY2015, the share was 82%.
Oracle can target a new swath of global, midmarket companies with SaaS and PaaS that would’ve never considered Oracle on-premises software.
That’s possible “because the SaaS service is much easier to consume for a midsize company than buying a computer, opening a data center, hiring a bunch of people, and running licensed software,” Ellison said.
4. How does cloud affect Oracle database adoption and upgrades?
Ellison thinks businesses will want to shift workloads much more dynamically between public and private clouds than most can do today.
“We're the only company that says, hey, what you run in the cloud and what you run on premises should be compatible so that you can push a button and move a workload from your private cloud to the Oracle public cloud and back again, or you can do development tests in the public cloud and do production in your private cloud on premises if you want to,” Ellison said.
These hybrid cloud models will spur adoption over time of Oracle’s latest database, 12c, as companies try features such as multitenancy or in-memory database in the cloud version, and then want the same in their on-premises private cloud, he predicted.
Catz said adoption of upgrade options related to security were up significantly, and that more customers also are looking at Oracle Database 12c’s multitenant option as they look to run in-house, private clouds with the same efficiency and architecture used by public cloud providers.
5. Are existing customers moving their on-premises applications and databases to cloud options?
Not en masse, no. As Hurd noted, more than 60% of Oracle’s new cloud customers had not been existing application customers. License updates and product support—meaning revenue from existing, on-premises customers—grew 8% in constant currency in Q4 FY2015, and renewal rates stayed at their historically high levels.
Yet even when discussing this enormous and still-growing revenue stream, Hurd and Catz didn’t blink on Oracle’s cloud emphasis and advantage.
“The way to think through this is you're going to have a very large on-premises environment, I think for a long period of time,” Hurd said. “But workloads are shifting to the cloud, and that is an opportunity for us as we maintain our on-prem base but grow our market share through this shift to the cloud, and we can see it and it's exciting.”
Catz described existing customers as mostly adding new capabilities via cloud, while keeping their on-premises licenses. But then she added: “We would like them over time, frankly, if we had our way, to move everything to the cloud.”
Business history shows established companies again and again trying to resist technology disruptions. When it comes to cloud computing, Oracle instead is looking to lead this dramatic shift. More important for the company, the cloud growth numbers suggest tech buyers are embracing Oracle’s software and platform services as they make their own shift to the cloud.
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