Oracle has been successful in very quickly and aggressively transforming itself into a cloud company, as it nears its end-of-October deadline to have nearly its entire software portfolio available in the cloud; however, as of its CY3Q15 earnings, Oracle counts only 7% of its corporate revenue from cloud subscriptions.
In this most recent quarter, the company continued to see declines in its traditional business, with new software license revenue growth of -16% year-to-year, to $1.15 billion. Despite currency headwinds and five consecutive quarters of new software license revenue declines, Oracle’s highly profitable and traditionally largest revenue stream, maintenance (reported as “software license updates and support”), has been able to remain relatively flat.
TBR believes that Oracle’s new software license sales will continue to decline at an accelerating pace as lower-value cloud subscriptions are adopted instead. This industry-wide trend will cause Oracle’s maintenance revenue to decline more substantially and dictate that Oracle overcome the inherent revenue and margin discrepancies of making its solutions available via the cloud by increasing sales volume to grow revenue during its transition, while simultaneously reducing associated expenses to buoy margins.
On its way to increased sales
Oracle is on its way to increased sales volume, as executives noted that the company’s cloud customer base that had been amassed over five quarters (even though TBR notes the company has been offering Fusion cloud applications for years) is already 10% of the on-premises customer base it took the company 24 years to build.
Further, CEO Safra Catz, did note that she believes Oracle’s cloud business has experienced its SaaS and PaaS gross margin “bottom”, and will see improvement to 60% gross margins by the end of FY16 (CY2Q16) and 80% a year after that, as capital expenditures taper materially through this fiscal year and next, and recurring revenue continues to supplement new contract additions. This margin improvement and relative maintenance revenue endurance foretells a better financial future than depicted in TBR’s recent case study (http://tbri.com/analyst-perspectives/special-reports/pgView.cfm?document=12205)of the financial implications of cloud disruption, but still leaves questions about the future of the remaining 93% of Oracle’ business.
Meanwhile, Oracle continues to acquire marketing cloud components, most recently Maxymiser, a U.K. marketing tech vendor that specializes in conversion rate optimization, which it bought in August.
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