Oracle Misses Q4 2015 Revenue Goals but Cloud Sales Look Promising for the Future

Oracle’s Q4 is typically the strongest quarter within the fiscal year, however, after looking at Oracle’s most recent Q4 earnings release, Oracle seems to have missed the mark. For 2015, Oracle’s Q4 revenue was $10.7B, down 5% and coming up short of the expected $10.95B. Oracle was quick to blame the shortcoming on the strengthening US dollar and currency headwinds that ended up being higher than consensus estimates. In addition, Oracle missed in one very important area, new software and licenses revenue. For Q4, Oracle reported $3.1B, down 17% in this category. The new software and licenses category is important to recognize because these revenues make up 29% of Oracle’s total revenues. Oracle’s CEO, Safra Catz, mentioned the decline is directly tied to an accelerated migration to cloud.

During the Q4 2015 earnings call, Oracle’s executives; Safra Catz, Mark Hurd, and Larry Ellison were extremely excited and eager to discuss the cloud and how Oracle has been performing to date and how well they expect to perform moving forward. For Q4 2015, Oracle’s new Software-as-a-service (SaaS) and Platform-as-a-Service (PaaS) annual recurring cloud subscription revenues were $426M, which represented an impressive 29% growth and a significant increase from the $300M Oracle had previously forecasted. For 2016, Oracle expects to achieve SaaS and PaaS revenue growth between 39% and 43%.

In terms of actual number of new cloud customers gained in Q4, Oracle added 1,217 SaaS customers and 1,419 PaaS customers. Oracle’s Executive Chairman and CTO, Larry Ellison believes much of the success associated with Oracle’s SaaS sales is tied to the rapid acceptance of Oracle’s new generation Fusion applications. Mark Hurd, CEO, also mentioned that when Oracle wins a SaaS deal they win more than just the cloud application deal, Oracle gains all the hardware, operating systems, database and middleware. For PaaS deals, Oracle gains all the database, operating system and hardware.

Oracle’s additional cloud offering, Infrastructure-as-a-Service (IaaS), had a strong quarter as well. For 2015, Oracle’s IaaS Q4 revenue actually grew 25%, coming in at $160M for the quarter.

For 2015, Oracle’s Q4 cloud billings grew 70% (in US dollars) to $834M from $468M in Q4, 2014. This is extremely impressive given the fact Salesforce and Workday’s most recent reported quarters showed billings growth of 21% and 31% respectively.

So why are Oracle’s executives so excited even though Oracle’s total revenue and new software and licenses revenues came up short this quarter? In the long run, they understand Oracle will make three times as much money on a cloud subscription than they would make on a typical on-premise software license deal. According to Catz, a traditional $1M on-premise software deal will bring roughly $3M to Oracle over 10 years ($1M upfront for the license and 20% of the $1M a year for support). A $1M cloud deal will generate $10M for Oracle over 10 years because organizations are forced to pay under a subscription based model for as long as they want to use the cloud solution.

We are observing an aggressive push from Oracle’s salespeople to get Oracle’s cloud solutions in front of key decision makers. Given Oracle is paying a higher commission on cloud deals, the sales representatives are packing deep upfront discounts to get the deals done. Even though the discounting may look attractive, don’t be blinded by it. Given you will need to renew your subscription in a few years to keep using the solution, it is perhaps more important to make sure you have competitive long term protections in place that mitigate the magnitude of subsequent increases.

We welcome your feedback and the opportunity to discuss how best to approach your upcoming cloud solution negotiations with Oracle. Please feel free to leave a comment and do not hesitate to contact me at amansfield@upperedge.com with any feedback or inquiries.