Oracle's cloud growth: Will it measure up?

Oracle's cloud growth: Will it measure up?

Summary: Cowen analyst Peter Goldmacher questions whether Oracle's big cloud talk can translate into the cloud revenue growth needed to fend off smaller rivals such as Salesforce and Workday.

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Oracle's cloud strategy, which revolved around acquisitions and its Fusion business, provided an initial pop, but may be sputtering.

That's the takeaway from Cowen analyst Peter Goldmacher. Goldmacher dug through Oracle's Securities and Exchange Commission filings to try and get a read on the company's cloud business. That task isn't easy since Oracle doesn't break down specific cloud product lines, but Goldmacher found enough to question whether Oracle's growth rate for the cloud can move beyond the teens. Oracle has touted 35 percent Fusion cloud bookings growth, but Goldmacher isn't buying it.

Goldmacher estimates that Oracle's second quarter organic cloud growth rate was 6 percent---14 percent due to acquisitions. "We believe Fusion has been growing about 10 percent over the last year and the acquired cloud assets are growing single digits," said Goldmacher in a research note.

He added:

While we acknowledge that our revenue growth numbers may not be precise, we do note that our estimate for Fusion revenue growth for the last few quarters (and 2Q14 in particular) is nearly a magnitude off from management’s claimed 35% bookings growth for its parent segment (with triple digit growth for Fusion ERP, SFA and HCM).

What Goldmacher is trying to solve for with Oracle's cloud growth is going to be a common problem for the industry. Mixed revenue models---licensing, support and cloud subscriptions---ultimately mean less transparency by product line. While Workday, Salesforce and NetSuite are easier to understand regarding cloud growth, tech giants can talk growth with a lot of footnotes and other assumptions. Simply put, cloud washing is an epidemic.

Also: Oracle snaps up marketing software maker Responsys for $1.5B | Oracle: Can it really sacrifice margin for commodity cloud? | Ellison defends Oracle's cloud strategy and pricing against Amazon, Microsoft | Enterprise software vendors face deflation: Advantage SaaS | Oracle's roadmap: The big questions ahead | Oracle's cloud strategy: Does it trump Fusion?

Oracle's cloud business is only 3 percent of revenue, but is the storyline for the company. For instance, Oracle executives said "cloud" 38 times on its second quarter conference call. If mentions were revenue, Oracle's cloud business would probably be at least a quarter of sales. But why pick solely on Oracle: SAP's cloud mentions to sales ratio is about the same.

oracle cloud cowen chart

 

Larry Ellison, CEO of Oracle, also showed up at the company's CloudWorld last week. Ellison said he views Amazon his primary infrastructure competitor and downplayed Oracle's rivalry with SAP and said the real competition is Salesforce and other cloud companies. Analysts such as JMP Securities' Patrick Walravens took Ellison's appearance as a sign Oracle has its cloud messaging down.

"Cloud gives us a lot of new market to pursue, and we are seeing that already. We have dramatically increased our sales force because we have so many more customers and companies to pursue with our cloud and SaaS offering," said Ellison.

The issue is that Oracle's cloud story is hard to tell because it's so broad. Oracle has acquired RightNow, Taleo, Eloqua and is about to buy Responsys. The tab for all of those acquisitions will be about $5.5 billion. What's unclear is whether the growth rates in the cloud business can be sustained by acquisitions. Goldmacher said that its cloud revenue growth was strong in fiscal 2012, but now has slowed significantly as these acquisitions are absorbed into the company.

Goldmacher noted that pegging Oracle's cloud revenue is "particularly vexing" because data from the company is sparse. But Goldmacher estimates that cloud revenue growth slowed after the Eloqua purchase in February 2013.

The crux of Goldmacher's note is that the best way to gauge the success of Oracle's cloud business is to look at organic Fusion growth. After all, Oracle won't be able to acquire companies forever. Fusion Cloud will have to drive growth if Oracle is going to bridge its applications to the future.

To be sure, there is a lot of inference in Goldmacher's analysis. One possibility is that Fusion Cloud could be doing better than Goldmacher's projections but cannibalizing sales of RightNow, Taleo and Eloqua. In either case, that scenario could also be troubling to Oracle's cloud growth and mean that the company's traditional merger playbook doesn't work for software as a service.

Topics: Cloud, Enterprise Software, Oracle

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  • How does this compare?

    Hey Larry,

    Nice article. It is worth bearing in mind that cloud sales are more relevant than on-premise sales because they have substantial recurring and often deferred revenue. The 2.8% can become a multiplier in future years as the size of the install base increases, and customers continue to renew.

    I'd be interested to see how this compares to other traditional on-premise companies like SAP, Microsoft and IBM. Plus, how it compares to the big SaaS players like Workday and Salesforce.

    John
    JohnMAppleby