Is Oracle Following in IBM’s Footsteps?


Bear, Clouds, downward trending line

Oracle had another lackluster quarter in Q3, with revenues growing only 3% in constant currency.  Keep in mind that Oracle also raises support fees by 3% every year, which does not account for all the revenue growth, but certainly a substantial portion.  Particularly concerning is that all of their cloud and on-premise licenses and services combined accounts for 82% of overall revenue, the heart of their business, and this large segment also grew at only 3% in constant currency.

Now Oracle is claiming that cloud sales are gaining momentum and since cloud revenue must be recognized over the duration of the term, new cloud deals won’t have a significant impact on revenue in the current quarter.  The impact will only be seen over time as more cloud deals are added and that revenue stream builds. Hopefully for Oracle, new cloud revenues will surpass the slow reduction in on-premise licenses and support as customers migrate to cloud.

But Oracle also stated they are closing net new cloud deals with customers that were previously on old non-Oracle ERP systems and are now upgrading to Oracle Cloud ERP.  This should result in greater revenue growth as these deals would be additive, as opposed to current customers migrating from on-premise to cloud.  Interestingly, Oracle stated that as a percentage of their total software business, cloud is now more than double what it was 3 years ago.  Contrast this to AWS which has had annual growth rates between 43% to 70% over the last 5 years with much higher comparative revenue numbers each year.

Oracle claims SaaS revenue is growing anywhere from mid-20% to 47% depending on the SaaS segment, but since they no longer break out these numbers in their financial reporting, there is no way to validate these claims.

Oracle is doing its best to spin a positive story, but the fact remains that their cloud growth pales in comparison to their main competitors. 

Oracle EPS Continues to Grow

EPS growth has remained rather high for Oracle which has improved the share price over the last year.  However, this can be a bit misleading, as EPS growth has been inflated as a result of a tremendously large stock repurchase program.  In Q3 alone, Oracle spent $10B to repurchase 206M shares, with the past 12 months totaling 728M shares and a reduction of close to 16% of all outstanding shares.

While Oracle has a very large war chest of more than $40B in cash and marketable securities, that will not be enough to sustain this level of stock repurchasing.  At some point, top-line revenue must grow.

Guidance for Q4

Oracle’s largest and most impactful quarter ends May 31st.  After trumpeting what a great quarter they had and how momentum is building, Oracle’s guidance for Q4 total revenue growth was 1% to 3% in constant currency and 0 to -2% in U.S. dollars.  Oracle’s storyline does not gel with their results or guidance.  AWS is not experiencing lackluster growth like this, nor is Salesforce or Workday in their SaaS businesses.

Workforce Rebalancing

Oracle recently initiated more layoffs, or as they like to call it, workforce restructuring to better align with their strategic direction.  They claim to be changing their employee skillset to improve their next generation cloud development.  This might very well be true, but it’s probably not the entire truth.  There have been multiple reports of age discrimination claims by employees and Oracle is also defending itself in a high-profile lawsuit for alleged wage discrimination by the U.S. Department of Labor.

What seems odd is that Oracle’s restructuring is happening even on software engineering and cloud development teams.  For a growing industry where software engineers are in high demand and often represent a substantial portion of H1B visas granted every year, it would seem that investing in the training of their current staff to acquire new skill sets would be more effective than layoffs.

The IBM Playbook

You may recall that not too long-ago IBM was facing years of declining revenues and experiencing many challenges in its evolution to realign the company for the future.  When looking at IBM’s actions, it bears an uncanny similarity to Oracle today.

In addition to declining revenues, IBM had considerable cash on hand and embarked on an aggressive stock repurchase program to maintain EPS growth and maintain its stock price.  They also provided future guidance that was below Wall Street expectations and underwent extensive workforce rebalancing across the globe as a means of cutting costs and replacing more senior, higher paid employees with younger, less costly resources.

IBM also had long established businesses and revenue streams that were not going to go away overnight, but they were losing customer confidence for the following reasons: poor product and service performance, lack of vision and execution, underappreciation of its customers with a presumption that customers would not reduce or stagnate their spend levels with IBM, and very poor customer relationships.   These issues grew over time from onerous pricing and commercial policies that took advantage of customers and made doing business with IBM difficult and unpleasant.

Both IBM and Oracle lost sight of why they exist, which is to serve their customers.  Instead, their focus and priority over time shifted to serving their own best interests in spite of their customers.  If you look at the success of almost any great business, they constantly strived for ways to improve customer value and innovate, knowing that by taking care of their customers first, profits and customer loyalty would follow.  They listened and cared about their customers, or at least gave the appearance that they did so.  In speaking with IBM and Oracle customers, they feel these vendors are only concerned with achieving their own goals and that customers are to be pressured or coerced into deals that align with the vendor’s strategic objectives, regardless of meeting their customer’s requirements and expectations.

A telltale sign is the atmosphere at OpenWorld.  There was little to no excitement from customers at any of the sessions we attended.  Overall, it felt like customers attended out of obligation.  Contrast this with Dreamforce a few weeks earlier, also in San Francisco, where the atmosphere and customer engagement were like a high energy workout followed by a nonstop party.  The enthusiasm and participation level of the guests are a reflection of their feelings towards the host.

Larry Ellison spoke passionately at OpenWorld about the approach Oracle took to do a complete architectural overhaul for building out their Generation 2 Oracle Cloud Infrastructure because he felt it was the only way to create the most secure cloud infrastructure possible.  He never mentioned the cost of doing this, just that it was the right thing to do to meet the cloud security requirements of customers.  We think Oracle would be best served if they took this type of approach to all aspects of its business, especially its sales approach and commercial terms.  If Oracle is unable or unwilling to change its entire customer approach, then it should not expect a strong desire from customers to migrate to Oracle’s cloud solutions.

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