Friday, June 20, 2014

Learning From The Earnings Call

So now that we've heard the Oracle FY14 Q4 financial results, what did we learn?  Most noticeably, Oracle continues to be a company in transition...and that transition is beginning to take hold.  Changing a company and an ecosystem as large as Oracle's is like turning a takes time.  But we have some pretty clear evidence that the battleship is turning.

Let's look at the numbers for a minute.  Oracle's SaaS and PaaS for FY14 came in at $1.12B (US).  That's up 23% from last year.  Heck, they're going that part of the business like a weed.  Oracle is already well past Workday in terms of annual revenue (although the comparison is a bit unfair because Workday isn't really in the PaaS business, so let's not count them out by any means), and is approaching about 50% of the latest SaleForce revenue numbers.  Comparatively speaking, Oracle is an up-and-comer in the space.

But the transition is not without some pain.  New software licenses were flat for the quarter and earnings-per-shared missed expectations.  That tells me two things:  1) some of that cloud growth is at the sacrifice of software licensing deals; 2) Oracle has yet to figure out how to make cloud services as profitable as license deals.  We're likely to see the second point work itself out as the pressure for margins ramps up through existing Oracle customers take advantage of the Customer 2 Cloud program.

So what we're seeing is the continuing transition of Oracle into a SaaS and PaaS provider, but with some speed bumps along the be expected in any transition, especially one of this magnitude.  So, you may ask, what's driving the growth?

IMHO, Oracle offers three factors that differentiate their SaaS and PaaS offerings from other market competitors:

1) A database that offers the benefits of multi-tenancy without commingling data.  That's a huge advantage in overcoming security fears of many potential cloud customers.  And, from what I can tell, security fears are the biggest objection for most potential cloud customers.

2) A very well-design User Experience with Simplified UI.  While there's still work to be done (let's build responsiveness into ADF, the tool used to build the UX, so that we can build once for all platforms), Oracle's UX has built a big differentiator in the marketplace.  And offering up the templates and design patterns so that developers can build their own apps with the same UX is a great approach.

3) Deep pockets.  Check out that Oracle balance sheet.  With all that cash, Oracle can afford to invest in growing their cloud business.  That includes investing in strategic customer accounts.

So while Oracle's Q4 report could have been better, I personally saw what I was looking for: tangible signs of progress in Oracle's transition.  Learned from the earnings call.  Ya'all go ahead and sell that stock.  Poo-poo all over the outlook.  Whatever.  The battleship is turning.

DISCLAIMER:  I hold 10 shares of Oracle stock that I acquired while working for Oracle in the 90's.  I keep it just for sentimental value.  I'm admittedly a big fan of Oracle technology.  And while I'm not always a fan of Oracle's business tactics, I think they're a very smart company from a strategic perspective.  So, it's true...I'm biased.  Now you know.

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