Oracle recently announced its fiscal year and Q4 2014 financial results. Overall, Oracle posted nominal revenue growth (3%) for both the quarter and fiscal year. After taking a closer look at the financials and listening to Oracle’s earnings call, it is apparent this nominal growth is directly impacted by flat to nominal overall hardware systems revenue growth (2% growth in Q4 and flat for the year), flat new software licenses revenue (both Q4 and for the year) and Oracle’s success in signing organizations onto Oracle’s cloud subscriptions.
For the quarter, GAAP Cloud software-as-a-service (SaaS) and platform-as-a-service (PaaS) revenues were up an impressive 25% coming in at $322M. Cloud infrastructure-as-a-service (IaaS) revenues were also up double digits during the quarter reaching 13% growth and $128M in revenue. For the fiscal year 2014, GAAP Cloud SaaS and PaaS revenues were up 23% to $1.1B while Cloud IaaS were $456M. As Oracle President and CFO, Safra Catz, was quick to point out, Oracle’s cloud subscription business “is now approaching a run rate of $2B a year.” Oracle, CEO, Larry Ellison made it a point to mention that “Oracle is now the second largest SaaS company in the world.” He later made it very clear where their attention will be placed moving forward when he stated, “We plan to increase our focus on the Cloud and become number one in both the SaaS and PaaS businesses.”
As organizations sign up for more and more cloud subscriptions, the revenue that was once recognized upfront must now be recognized over the life of the subscription. This has an immediate impact on recognized and reported revenue. For Oracle and other cloud vendors like Salesforce.com and Workday, the impact on the upfront recognized revenue is greatly offset by the lucrative and recurring revenue streams that come with subscription based cloud agreements. When an organization executes a cloud subscription agreement, they are essentially renting the right to have access to the solution as long as the subscription agreement is in place (i.e. non-renewal means no access to the solution). This is much different than the more traditional on-premise scenario where an organization is actually making a purchase and maintains a perpetual license to continue to utilize the software even after terminating maintenance. Oracle, like all other cloud vendors is aggressively pushing the shift to the cloud model because they know that in order for an organization to continue to receive the value of the cloud solution after the initial term, they must renew for another subscription term (typically another non-cancellable 3 years). The likelihood of renewal in this situation is extremely high considering the organization is most likely now “up and running” on the new cloud solution and has already spent a significant amount of time and money on the solution and can’t simply pull the plug and move to another solution. This promotes “vendor lock-in” which Oracle and other cloud providers welcome.
As Oracle continues to ramp up its efforts and drive its customers into the cloud, it is critical for organizations to take a step back prior to signing on the dotted line to ensure their cloud subscription agreement not only provides best-in-class pricing but even more importantly, sufficient flexibility and competitive downstream price protections. Given the high likelihood of vendor lock-in with cloud arrangements and the limited negotiation leverage at renewal time, it is difficult, if not impossible, to make up for past mistakes. It is therefore imperative for organizations to ensure they have the right deal in place from the start.
If you would like to learn more about how to ensure you execute the proper cloud subscription agreement with Oracle or any of the various cloud vendors, or if you have any comments and/or questions regarding any of the above, please feel free to contact me at [email protected]