- Oracle is increasingly becoming a SaaS/PaaS company.
- Are they growing this segment fast enough to stem the bleeding in software and hardware?.
- What is the timeline we're looking at for Oracle's recovery into the black?.
With each passing quarter, Oracle Corporation's (NYSE:ORCL) transition into a new age company looks closer than ever. But somehow, revenue growth remains elusive to the database king. As the world steadily moved towards cloud-based infrastructure management, Oracle was the one company that had a lot to lose as their core business model and products were built to address companies needs to manage their own Infrastructure.
After refusing to jump onto the cloud bandwagon for long, Oracle has finally embraced the cloud with open arms and it has been steadily expanding in that area.
Oracle’s Dilemma: Infrastructure, or Software and Platform?
Outside of their database business, Oracle - along with SAP (NYSE:SAP) - sat at the top of the Customer Relationship Management market for a long time, only to see Salesforce.com (NYSE:CRM) come from behind and leave both companies in the dust, usurping the No. 1 position in that market. Salesforce has now built a significant lead in that area, and their startup-like mentality has pushed them to expand their portfolio to cover nearly every area of sales and human resource management.
By the time Oracle realised that it was late to the cloud party, the company knew that fighting a direct head-to-head battle with cloud industry leaders Amazon, Microsoft and IBM would be a foolhardy endeavor. Each of the big three in the cloud space has invested tens of billions in data centers, research & development and product development, and Oracle knew it couldn’t compete on such a scale. If they had done that, they would have had to offer deep discounts and work with wafer-thin margins.
In addition, Oracle’s declining revenues on the software and hardware side were exerting a downward pressure on their overall revenues. So they did the next best thing. Using their expertise in Human Capital Management and Enterprise Resource Planning, they started offering cloud-based services along these business lines.
That move was clearly a sound one because the relationships they already had with their customers gave them the leverage they needed to push this business to the forefront. Today that move has started paying off and their SaaS and PaaS revenues are quickly growing to compensate for core revenue losses.
The Benefit Holds a Hidden Challenge
During the fourth quarter of 2016, Oracle’s SaaS and PaaS revenues grew 66% to reach $690 million while IaaS revenue grew 5% to reach $169 million, giving them a grand total of $859 million in cloud revenues for the quarter. Oracle’s current cloud-based revenue run rate is nearing $3.5 billion and the company has set the $10 billion mark as their next goal.
But they have one problem with this business model. On the SaaS and PaaS front, especially on the CRM side, Salesforce is a very strong competitor. But Oracle has taken the gamble and is now positioning itself as the company that offers software that you can use to manage your business. And if that brings CRM and Salesforce in their line of sight, then so be it. Between fighting Amazon, IBM and Microsoft head on and taking on Salesforce, Oracle obviously made the wiser choice.
Adding the NetSuite Factor
Even with SaaS and PaaS, Oracle is taking a divergent route from Salesforce in its pursuit for more sales. Their recent acquisition of NetSuite for $9.3 billion received a lot of coverage in the media as Oracle’s co-founder Larry Ellison was already a Netsuite investor. But the acquisition is a strategic one for Oracle. Apart from giving them a revenue boost, NetSuite brings solid cloud expertise on the Enterprise Resource Planning side because it is the No. 1 cloud ERP provider in the world with more than 30,000 clients on its books.
Though Salesforce is also pushing deeper into the business management software area with its recent acquisitions, it does not have any significant presence in that area - one that has been controlled by Oracle and SAP for a long time. By bringing NetSuite into the game, Oracle is positioning itself as the go-to player in the cloud ERP segment where the competition has neither the size nor scale to go head-to-head with them.
The Investment Perspective
With the Global ERP software market expected to reach $41.69 billion in sales by 2020, Oracle’s move to strengthen its offering in the cloud ERP market will serve the company well in the long run. More importantly, it also takes them several steps closer to achieving their goal of $10 billion annual revenue from SaaS and PaaS.
As far as I’m concerned, Oracle corporation stock is still very much a HOLD for me. What I really need to see as an analyst is at least two-quarters of net zero losses before saying that Oracle’s new business model will help them turn around their fortunes.
The 2018 fiscal will be critical for them because that's when I see things really turning around for the company. Until then, we'll have to watch their SaaS/PaaS numbers closely to see when they'll stop the bleeding in their software and hardware segments.