Q2 FY2014 Results: Oracle Looks to the Cloud to Stimulate Revenue Growth

Oracle CLoud PictureOracle’s total revenue reached $9.3B in Q2 2014 which represented a 3% increase year-over-year and an “achievement” that came in slightly ahead of what was expected ($9.1B).  Following up on what we reported last quarter, this is now the seventh (7th) straight quarter of nominal to negative total revenue growth for Oracle.  Oracle is expecting total revenue growth in Q3 2014 to range from 3% to 7% in constant dollars.  With this, if Oracle meets expectations (i.e. low end of the range) or comes up slightly short, they would once again experience a quarter of nominal to negative total revenue growth, a trend that Oracle simply must break away from.

After listening to Oracle’s Q2 2014 earnings call, Oracle’s plan to accelerate revenue growth is quite evident.   Oracle’s immediate plan is to focus the majority of its attention and the attention of its reorganized and growing sales group on three (3) product lines.  Those being cloud applications, database, and engineered systems.  The remaining portions of this blog are going to focus on cloud applications.   Before moving on, it is important to mention that it is fully expected that Oracle’s sales force will be extremely aggressive in their approach to bringing closure to any deal on the table that involves one of Oracle’s database products or engineered systems.  This is especially true if an organization is evaluating any one of Oracle’s competitor’s offerings.  If done correctly, there is a tremendous opportunity to use Oracle’s self-imposed obligation to drive more revenue from these lines of business to manufacture significant leverage to negotiate additional “one-time” or “promotional” discounting and highly competitive commercial terms.

With regard to cloud applications, Oracle experienced bookings growth of 35% in Q2 2014.  Mark Hurd, President and Director at Oracle, mentioned that this growth was across all major cloud offerings in Oracle’s portfolio.  He went on to say that Oracle’s cloud and engineered systems business have “hyper growth” like characteristics.  In addition, Oracle indicated that they are adding customers at high growth rates, and contract sizes are in fact growing.  Both of these things are strong foundational building blocks to build on and are a large reason why Oracle has made the decision to focus its efforts and resources on the cloud to stimulate and accelerate revenue growth.   Oracle’s reported success in the cloud application space (i.e. more deals and larger deals) will positively impact revenue in the short term, but more importantly, stimulate longer-term revenue growth.  The reason for such short and long term impact is directly tied to the subscription based model (rent v. own) that comes with the sale of cloud applications.  Under such models, organizations are left with no choice but to renew, fearing they will lose access to the heavily relied upon functionality if they don’t.  Such renewals provide Oracle with annual and often multi-year revenue commitments on an ongoing and potentially perpetual basis.

One of the specific cloud applications that Oracle has reported excellent growth as well as key wins in Q2 2014 and will most certainly focus its attention on moving forward is HCM (Human Capital Management).  In fact, Oracle reported that Fusion HCM’s bookings actually grew in triple digits.  Whether it is core HR, payroll, talent or some combination thereof, HCM is an area that many organizations have developed and are currently developing business cases for and seeking budget to make investments in. Knowing this, it makes perfect sense why Oracle would focus on the HCM space (specifically with cloud applications) and attack the market with a sales group that is trained for and incentivized to close more and larger deals.   We are seeing this play out in the market place.  At UpperEdge, we have advised and are currently advising many organizations that are evaluating any one or a combination of many HCM solutions (Oracle, Workday, SAP/Successfactors, Ultimate…etc.).  These organizations are experiencing a highly competitive market place that has fostered an advantageous environment for achieving highly competitive upfront pricing and payment terms.  With that being said, they have also learned very quickly the importance of making sure they effectively navigate the sourcing, negotiation and contracting events with the vendor(s) as there are numerous “gotchas” associated with the subscription based agreements that come with such HCM cloud based solutions.  If these issues (and there are many) are not addressed properly they could significantly offset and negatively impact any achieved upfront discounting and beneficial payment terms.

We do not expect this competitive market place to go away anytime soon as IT spending is expected to elevate in 2014 and the cloud is top of mind and being adopted with less resistance.  It will persist in the HCM space, but we also fully expect other cloud applications (CRM is a really good example) as well as other cloud services such as PaaS (Platform as a Service) and IaaS (Infrastructure as a Service) to have market places that are highly competitive as well.  Closing a cloud deal, especially a large cloud deal, means Oracle (or any other cloud vendor) is ultimately building and expanding its subscription base.   As these deals convert to annual (during the initial/upfront subscription term) and renewable subscriptions (i.e. the period of time beyond the initial/upfront subscription term) they become recurring revenue that closely resembles the revenue associated with Oracle’s support (i.e. maintenance) business. Why is this important?  Oracle knows and has reaped the benefits of a support business that acts as an annuity business that is highly profitable.   If Oracle can shift the mix within their software business so a larger percentage of the mix is subscriptions versus licenses, then there is a positive impact on operating margins and profitability.

Knowing the positive ramifications of closing such cloud deals, Oracle has made modifications to their sales organization to be in the best position to succeed in such a highly competitive market place and win business from their competitors.  In fact, CEO, Larry Ellison, mentioned during the recent earnings call that Oracle has made the strategic decision to lineup a dedicated HCM sales force whose sole focus is to go out and compete directly against Workday with the goal of capturing every prospect that is out there   Ellison also mentioned that Oracle is taking this same approach in order to most effectively compete against Salesforce.com (CRM) and SAP (ERP) as well.  Hurd, expanding on this, mentioned during the call that Oracle was really going to “lean into” the cloud to capture market share.

Lastly, and further supporting the notion that Oracle is clearly focused on (and making investments in) the cloud as a means to accelerate revenue growth, Ellison made it a point to mention during the earnings call that Oracle already has more enterprise SaaS applications than any other cloud services provider and that Oracle will continue to expand Oracle’s footprint and use Oracle’s size as an advantage.   In fact, Oracle didn’t take long to put these words and this plan into action as they have already announced the acquisition of Responsys (cloud-based business-to-customer marketing software) and Corente (networking technology maker).  Both acquisitions will immediately expand Oracle’s cloud-computing services.

If you would like to learn more about how UpperEdge has helped organizations navigate the persistent and aggressive sales teams pushing cloud applications, how best to effectively negotiate with Oracle or other vendors pushing the various cloud solutions, or if you have any comments and questions regarding any of the above, please do not hesitate to contact me at [email protected]

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