Oracle’s (ORCL, Financial) annual revenue has been nearly flat for the last five years (2012-2016), staying around the $37 billion range. In many ways it was a stunning reversal of fortune for Oracle because the company doubled its revenues in the five years before that (2007-2011), moving from $17.9 billion to $35.6 billion. The growth of the infrastructure as a service segment in cloud computing completely transformed the IT industry, and Oracle learned a painful lesson.
Its strength in databases and its strong enterprise-focused IT infrastructure expertise helped it hold its ground, but Oracle knew it was on an unsustainable path in the long run. The relatively recent change of mind is indeed helping Oracle as the company races toward $10 billion in annual revenues from its software as a service segment.
Though the company keeps making public announcements about how it is going to be an irresistible force in the IaaS segment, the fact that it has less than $200 million in quarterly revenues to show for it makes it clear that the company has a mountain to climb despite having multimillion-dollar clients under its roof.
Oracle started late and now it needs plenty of time before before it can build itself into a position of strength in the IaaS segment. But it is the company’s SaaS segment that has been performing in a big way, and it has already started to cover for a lot of weakness within Oracle’s other segments.
In the first three quarters of the current fiscal Oracle made $2.686 billion from the software as a service segment, posting growth of 77% compared to the prior period. The increase of $1.169 billion in sales was good enough to offset the 10% decline in hardware revenues and 16% decline in new software licenses.
It was the growth of SaaS that saved the day for Oracle as every other segment reported declining revenues. Oracle made a smart investment by pouring nearly $9 billion into Netsuite, which has a strong position in the Cloud ERP segment. Netsuite not only expanded Oracle’s position in the enterprise management software as a service segment but also put Oracle in a position of strength in an area where both Salesforce (CRM, Financial) and Microsoft (MSFT, Financial) are weak.
Customer relationship management (CRM, Financial) and enterprise resource planning (ERP) are the two largest enterprise management software market segments. Salesforce is firmly in control of the CRM segment, and Microsoft is also building its enterprise management software using Dynamics 365, which covers CRM as well as ERP. Oracle, with Netsuite, is now strong in the ERP market. The battle lines between these three companies will get really thin over the next few years, but Oracle and Salesforce are already headed toward taking control of the ERP and CRM markets.
Oracle does have plenty of room to grow in the SaaS market, and $10 billion in annual revenues from this segment is absolutely possible considering the size of the CRM and ERP markets, which run in the tens of billions of dollars. The growth of SaaS, as we have seen in the last three quarters, has already reached a position from where it can mask a lot of weakness in other segments, but Oracle has to make use of the time available and replace its loss in hardware and software licensing revenues with IaaS. If it can do that in the next year, then the company will have truly turned a corner.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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