Expanding Section: How Oracle Presents its Cloud Revenues

The following is a very common type of quotes around the cloud from Oracle.

“Some of the biggest stars are Oracle’s Autonomous Database, its Fusion ERP and human capital management cloud applications, and its NetSuite cloud application suite. Shrinking businesses include some on-premise hardware products.

You have these very modern businesses…growing very rapidly, taking share, clear #1s in the overall marketplace,” Ellison said. “And you have these other businesses that are melting away, and we just don’t care.

For example, for its 2019 fiscal year ended May 31, Oracle’s Fusion ERP and HCM cloud applications revenues grew 32%, and its NetSuite revenue grew 32%.” – Forbes

Very little of this quotation is true.

We already addressed the Autonomous Database in the database section. Let us address the other areas discussed in the quote.

Is Netsuite Driving Oracle Growth?

Oracle has reported fast growth with NetSuite, and this may be true, but NetSuite is less than 1/40th of Oracle’s overall revenue, and it is a lower priced item and has a far lower margin than Oracle’s other products. That is, its growth is not particularly impactful on Oracle’s income statement. Vendors often tout their cloud business, but what is as frequently left out is that the cloud business tends to be low margin.

Is Fusion ERP and HCM Cloud Driving Oracle Growth?

The statement around Fusion ERP and HCM Cloud growth is quite false.

For years now Oracle has played an accounting trick by selling customers both the on-premises applications and then the duplicate cloud-based application. However while the customer implements the on-premises version, the sales rep is compensated on the basis of the cloud license, and the cloud license sale is reported to Wall Street as a cloud sale. This information comes from multiple Oracle sales rep and is a well known “secret” within the company. Because of this, it is highly unlikely and unknowable (from the outside) how much Fusion ERP or HCM Cloud grew. It cannot be discerned from reviewing Oracle’s financial statement. As has been the case since Oracle semi-duplicated its on-premises applications to SaaS version (the Fusion project), Oracle customers have not migrated to these SaaS versions. This is explained by a Rimini Street survey.

“This makes sense in light of the fact that migration to Oracle SaaS requires a full “rip and replace” for the modules impacted, essentially making it a reimplementation. In addition, Oracle has stated that its own Soar cloud migration ERP program does not apply to 93% of their installed base. Cost issues also factor into customer decisions, with 30% finding Oracle’s offering too expensive. Even Oracle CEO Mark Hurd has stated in investor calls that customers who move to Oracle’s SaaS will typically pay three times more than they pay before doing so. “

Oracle as On Premises First

Oracle continues to be predominantly an on-premises software vendor. The vast majority of its database and application business continues to be delivered on premises. Oracle is posing as a cloud company because this is the storyline that Wall Street has told Oracle they want to hear, allowing them to obtain the maximum valuation.

Although we are straightforward in observing that Oracle is misleading Wall Street, this section was not written to critique Oracle or to say that because Oracle is predominantly not cloud that this reduces their prospects. The most profitable software vendors continue to be on premises, not cloud vendors.

Fake It Until You Make It (to the Cloud)?

Oracle is not a cloud vendor, and it does not have a pathway to becoming a cloud vendor. Oracle is a cloud vendor to Wall Street and on-premises vendor to its customers.

Category: Oracle