Cloud is the future and critical for most tech giants. Oracle Corporation (NYSE:ORCL) is no exception.
Oracle now generates more than $1 billion of subscription revenues annually from its cloud-hosted application suite, equal to about 3 percent of total revenues and 11 percent of total software license and subscription revenues.
This is roughly equivalent to what rival SAP is generating While the move from effectively zero to $1 billion in cloud revenues over the span of three years has been impressive, Oracle still has a long way to go.
Rival and cloud leader salesforce.com (NYSE:CRM) posts $1 plus billion of revenues per quarter, while Oracle's GAAP cloud revenues were up just 19 percent year-over-year in the recent November 2013 quarter.
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Oracle competes with niche cloud vendors such as Salesforce, Workday (NYSE:WDAY), Veeva, NetSuite, and Concur. These rivals are eating the lunch of Oracle's and SAP's legacy on-premises applications business.
Deutsche Bank analyst Karl Keirstead estimates that Oracle's on-premises, application software license sales likely declined by about 25 percent year-over-year in the recent November quarter. This is alarming, to say the least, although the decline in Oracle's total on-premises applications revenues (including maintenance support) is likely much less given that maintenance fees decline with a lag.
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While concerned, one should not panic. Oracle's guidance for new license sales and subscription revenue growth of 1-11 percent for its third quarter (up from zero growth in the November quarter) implies that the decline in on-premises application license sales will likely moderate.
In addition, the on-premises applications business is now down to 17 percent of total license and subscription sales, down from 23 percent two years ago. Even if this rate of decline continues, it's becoming a much smaller piece of Oracle's total license mix given the steady growth in the much larger database business and the ramp of cloud subscription revenues.
Though the decline in new on-premises application license sales will undoubtedly pressure Oracle's on-premises maintenance fee stream, Oracle has one key lever – renewal rates – to try to stem that decline.
Keirstead noted that absent new license sales in a very mature and highly penetrated ERP market, Oracle can direct its efforts to improving the user experience and functionality of its on-premises software to reduce the predilection of customers to consider Workday or other alternatives.
Oracle can also use price (reducing the cost of professional services associated with upgrades) to limit customer attrition. Also, recent trends suggest an uptick in demand for PeopleSoft v9.2 migrations after IT budgets seemed to loosen up a bit.
If the partner checks have to be believed, then Oracle now has a more active "protect the base" inside selling and calling program to convince existing PeopleSoft customers to upgrade to v9.2 instead of considering cloud alternatives such as Workday.
Meanwhile, Oracle's focus on its Cloud suite has ramped materially of late, as the recent Oracle HCM World conference in Las Vegas was the first time that both Larry Ellison and Mark Hurd presented at the same event outside of OpenWorld, an effort on the part of Oracle to demonstrate the seriousness of its Cloud push to both customers and employees. According to Keirstead's checks, Oracle is now flagging about 400 Fusion Cloud customers.
A new version of Fusion Cloud (v8) is available for new customers and is expected to be launched to existing v5 or v7 customers in March 2014. In terms of the HCM Cloud, v8 will add a time and attendance module (a hole in the suite) and will (finally) integrate with Taleo's Enterprise modules.
In terms of cloud suite, Oracle still does not have anything close to the kind of customer traction necessary to conclude that it is winning the battle with Salesforce, Workday, Veeva and the other SaaS vendors that are fighting to replace on-premises Oracle systems.
However, Keirstead say it doesn't need to be winning. He says that Oracle needs to pour resources and senior leadership energy into upgrading the on-premises versions (as it's done with PeopleSoft v9.2) and upgrading its Cloud suite (as it did with v7) in order to stem the share losses to manageable proportions.
Oracle claimed that annualized cloud bookings were up a full 35 percent. Oracle cites about 10,000 Cloud customers, equal to 2-3 percent of its 400,000 global customers.
Oracle signed a deal to buy cloud marketing, automation software vendor, Responsys for $1.5 billion in December. In January, it struck a deal to buy Corente, a provider of software-defined networking (SDN) technology for wide area networks (WANs). The Corente deal extends Oracle's virtualization capabilities with leading software-defined networking technology to deliver cloud services
In February, Oracle agreed to acquire BlueKai, developer of a popular, cloud-based, data management platform (DMP) for online, offline, and mobile marketing data. DMP is the key asset of BlueKai and would help Oracle effectively compete against Salesforce, which doesn't yet offer a DMP product.
Oracle is a massive ship to turn, and it's happening slowly, but the business software giant is at least making many of the right moves and may be further along on its cloud journey than most Street analysts think.
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