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Larry Ellison Laughed at the Cloud, Now the Cloud Is Laughing Back

Oracle is showing steady growth, but its competitors are bigger and growing faster. Can Oracle avoid getting flattened?

Mitch Wagner

June 20, 2018

6 Min Read
Larry Ellison Laughed at the Cloud, Now the Cloud Is Laughing Back

In an era when bigger competitors are growing much faster in the cloud, Oracle turned in lackluster quarterly earnings, and it's getting beat up on Wall Street as a result.

While the overall cloud market is growing an estimated mid-double-digits, Oracle Corp. (Nasdaq: ORCL) on Tuesday reported quarterly revenue up 3% to $11.3 billion for the fourth quarter, ending May 31. And while services and support were up, that was only single digits, and license revenues were down significantly. Cloud services and license support revenues were up 8% to $6.8 billion, while cloud and on-premise license revenue were down 5% to $2.5 billion. (See Oracle Reports $11.3B 4Q Revenue Up 3% YoY .)

Results weren't much better for the full fiscal year 2018. Total revenues were up 6% to $39.8 billion, cloud services and license support revenues were up 10% to 26.3 billion and cloud and in-premise license revenues were down 4% to $6.2 billion.

Oracle traded at $42.68, down 7.76% midday Wednesday.

Figure 1: Larry Ellison could end up like this. Photo by Boondock Studios (CC BY 2.0) Larry Ellison could end up like this. Photo by Boondock Studios (CC BY 2.0)

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How much of the revenue and growth comes from the cloud? We don't know. Oracle has stopped breaking out its cloud revenue from on-premises revenue. That's because Oracle has transitioned to a Bring Your Own License plan (BYOL), where customers can use the same license for on-premises and the cloud. Previously, when Oracle reported cloud revenues separately, that revenue growth was slowing in consecutive quarters. (See Can Automation Fix Oracle's Cloud Mojo?)

BYOL is a good move by Oracle and its customers, making it easier for enterprises to transition from on-premises to the cloud at their own pace. But the change makes it impractical to separate cloud from on-premises revenue, CEO Safra Catz said on an the company's earnings call Tuesday.

The new reporting structure ticked off Wall Street analysts, because Oracle is making it more difficult to see into the long-term health of its business. On Tuesday's earnings call, Jefferies and Company analyst John DiFucci asked how investors could "get comfortable" that Oracle is not "obfuscating any cloud weakness."

Catz responded: "So first of all, there is no hiding." The new reporting procedure is "the way to understand our business better," she said. Under prior reporting methods, total cloud revenue was $1.7 billion.

Still, Oracle's cloud competitors, such as Microsoft and IBM, make a point of doing at least some separation of legacy and cloud revenues -- although those two companies note that many of their customers are hybrid cloud installations, running applications both on-premises and in the cloud.

Separating cloud from legacy revenues gives legacy providers an opportunity to shine a spotlight on fast-growing cloud revenues, while distracting attention away from slower on-premises business.

Oracle no longer has that luxury. It's just one company now, focused now on overall revenue, which the company expects to accelerate because cloud revenue is becoming a larger part of overall revenue. Also, Oracle expects to once again deliver double-digital earnings per share growth for the year, Catz said.

But Oracle just isn't keeping up in the cloud. The overall cloud market grew 51% in the first quarter of 2017, with Amazon Web Services holding the lead with 33% market share, holding steady at roughly that share for 12 quarters, even as the market nearly tripled in size, according to Synergy Research Group. Microsoft, Google and Alibaba have all grown market shares, at the expense of other players. IBM is holding steady in fifth place at about 8%. Oracle doesn't show up in Synergy Researcher's figures.

Next Page: "Hopelessly Far Behind"

Also, Oracle doesn't show up in the top ten for capex growth, according to Synergy Research. (See Hyperscale Capex Leapt to a New High in Q1.)

Capex growth is the name of the game, argues Charles Fitzgerald, managing director of Platformonomics, a strategy consulting practice for technology companies. Oracle is "hopelessly far behind" on capital investment, he says in a May 24 blog post. "Deploying dozens of racks a week may sound good if you don't realize the hyper-scale clouds do orders of magnitude more every week."

Fitzgerald adds, "As I keep repeating, capex is both a prerequisite to play in the big boy cloud and confirmation of customer success."

Nonetheless, Oracle CEO Mark Hurd called it a "great fourth quarter," beating the constant currency forecast by more than $200 million. And he noted that Fusion ERP and HCM SaaS cloud application suite revenues grew over 50% in the fourth quarter. Oracle is outpacing the market on cloud applications, he said.

Catz called out earnings per share growth as a highlight. She had forecast double-digital non-GAAP earnings per share growth for 2018, and EPS grew 14% this year, she said. She said she expects to do it again next year.

Also, the Oracle board declared a quarterly cash dividend of $0.19 per share.

Oracle is staking its future on a one-two punch: Part one is migrating its vast, existing customer base for on-premises software to Oracle Cloud. On the earnings call, Larry Ellison, Oracle chairman and CTO, said Oracle has a bigger installed base of database users than IBM and Microsoft combined. The process of migrating those users to the cloud has already begun; for example, AT&T is moving thousands of databases and tens of thousands of terabytes of data into Oracle Cloud. "We think that these large scale migrations of Oracle database to the cloud will drive our PaaS and IaaS businesses throughout FY19," Ellison said in Oracle's earnings press release.

The second element of Oracle's hoped-for success is emerging technology, particularly its autonomous cloud offering -- automated database and platform as a service (PaaS) tools that require no operator intervention, vastly cutting costs compared with the Amazon competition. (See Oracle Expands Cloud Autonomy, Data Centers & SLAs and Upcoming Oracle DB Hits All Buzzwords.)

It's a formula that could work. However, with bigger competitors growing much faster than Oracle, the formula might not be enough.

When the cloud first emerged, Ellison ridiculed the technology, saying it's just another buzzword for the way Oracle has always done business. (See 'Larry Ellison Just Doesn't Get It'.)

Now it's Ellison himself -- and the company he built -- at risk of looking ridiculous.

— Mitch Wagner Follow me on Twitter Visit my LinkedIn profile Visit my blog Follow me on FacebookExecutive Editor, Light Reading

About the Author(s)

Mitch Wagner

Executive Editor, Light Reading

San Diego-based Mitch Wagner is many things. As well as being "our guy" on the West Coast (of the US, not Scotland, or anywhere else with indifferent meteorological conditions), he's a husband (to his wife), dissatisfied Democrat, American (so he could be President some day), nonobservant Jew, and science fiction fan. Not necessarily in that order.

He's also one half of a special duo, along with Minnie, who is the co-habitor of the West Coast Bureau and Light Reading's primary chewer of sticks, though she is not the only one on the team who regularly munches on bark.

Wagner, whose previous positions include Editor-in-Chief at Internet Evolution and Executive Editor at InformationWeek, will be responsible for tracking and reporting on developments in Silicon Valley and other US West Coast hotspots of communications technology innovation.

Beats: Software-defined networking (SDN), network functions virtualization (NFV), IP networking, and colored foods (such as 'green rice').

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