Oracle’s Q3 2016 Earnings Performance – 3 Takeaways for Customers

Prior to Oracle’s Q3 earnings release, we posted a piece on what customers can expect from Oracle in Q4.  Now that Oracle has released their Q3 earnings, here is an update.

Cloud Growth Continues

Oracle reported 57% growth in their SaaS and PaaS cloud category, while IaaS decreased by 2%.  New on-premise software revenue continued to decline this quarter by 15%.  Mark Hurd clearly stated that Oracle will gladly trade in new software license revenue for cloud revenue, so they see this as a positive development.  However, total revenue declined 3%, being dragged down by declines in hardware products and support in addition to on-premise software revenue.

Gross margin for SaaS and PaaS was 51% in Q3, up from 43% in Q2.  Oracle is forecasting greater margin improvement in Q4 as a result of what Mark Hurd characterized as their biggest pipeline ever. Eventually, Oracle stated it is targeting an 80% gross margin in the long run.  The margins will continue to grow as a result of the infrastructure already in place and paid for over the last few years.  So with capital expenditures tailing off and the infrastructure now in place to support cloud deployments, every cloud deal Oracle closes adds to top line revenue growth and improves gross margin.

Oracle is doing a good job spinning flat total revenue but there is some real upside when you consider the cloud as a much larger, stickier revenue stream with greatly improving margins.  The pressure is on now for Oracle to continue to deliver the promised growth and close deals based on this tremendous pipeline they keep touting.  This can create negotiation leverage for customers if understood and utilized properly.

Winning Market Share and an Eager Sales Team

Once again Oracle’s bravado was on display as Mark Hurd cited numerous customer wins – such as 942 new SaaS customers and an all-time high of 783 customer expansions in Q3.  Oracle claimed they are seeing Workday defections, even citing a few specific customers, and that in the past 2 years they have nearly doubled the number of Workday customers.  When it comes to competing for ERP customers with Workday, Mark Hurd called it “a slaughter.”

These are some very bold claims by Oracle and you can be sure Wall Street will be looking to hold Oracle accountable if this proves untrue or if Oracle is unable to deliver on its projected growth.  Especially since Mark Hurd touted their tremendous pipeline and a sales force staffed 2-3 years ago that is fully trained.  The pressure is always on to deliver in the sales world, but Mark Hurd has a unique way of truly turning up the heat on his team.  Raising the stakes can be a good thing as it demonstrates confidence in the sales team’s ability to close deals.  But the thirst to close deals can be used as negotiation leverage to achieve non-standard discounting and commercial terms for customers that know what is possible and execute to a sound strategy and approach.

Operational Transformation

There was a rather interesting comment from Safra Catz where she stated that Oracle is “aiming to be the easiest company in the business to do business with.”  She failed to elaborate on any details other than to say “some very good positive changes are coming that we think our customers will love.”  Based on Oracle’s history with customer relationships, their siloed business unit approach, ever changing licensing policies, and strict support fee policies and annual price increases, it will be very interesting to see what actually changes in the future.  Perhaps this is why Oracle’s licensing agreements are no longer available for download on its website; to be modified to reflect these operational transformation changes.

If Oracle is in fact being genuine in making efforts to be easier to do business with, then Q4 could present a great opportunity for customers to negotiate highly competitive deals and even right-size the under-utilized portion of their Oracle license footprint, resulting in support fee reductions and receiving greater value on each Oracle investment dollar.

In summary, for customers considering an Oracle investment, there are opportunities to create leverage to negotiate a great deal with Oracle – such as Microsoft’s offer to migrate to SQL Server with no license fees.  The challenge is knowing what a great deal actually looks like and the communication approach for how to obtain it.  This is where UpperEdge can provide assist, either behind the scenes or at the negotiation table.

We would love to receive your feedback and thoughts, so please do not hesitate to post a comment. You may also contact me directly at jlazarto@upperedge.com if you would prefer a more discrete discussion regarding your specific circumstances.