Oracle (ORCL, Financial) has been a little late entering the cloud race, one that is currently dominated by Amazon (AMZN, Financial), Microsoft (MSFT, Financial) and IBM (IBM, Financial), each company having its own unique strengths and weaknesses.
Altough none of these three companies break out their cloud revenues the same way, it’s clear that the growth has been at or above the 50% level for the last several quarters for all of them.
Microsoft and Amazon have already crossed over into $3 billion-plus in quarterly revenue territory. If they maintain the current momentum they should be able to hit $20 billion in cloud-based revenues within the next two to three years.
Oracle, on the other hand, has a long way to go before we can even count it in the same league.
Oracle’s cloud infrastructure (IaaS) segment reported $175 million during the most recent quarter with the segment posting a growth of 7% compared to last year. For fiscal 2016 Oracle’s IaaS revenues only grew by 6%. Clearly, the growth rate is much lower than that of the cloud leaders. Microsoft’s IaaS offering, Azure, for example, has been growing above the 100% quarterly rate level for the last several quarters.
Oracle still lacks the breadth and depth of Amazon and Microsoft’s cloud offerings when it comes to infrastructure management, and there’s plenty of work still left to be done if it wants to match the data center footprints that Amazon, Microsoft and IBM have built over the years.
With stronger growth, stronger offerings and much stronger footprints, Oracle’s future plans in infrastructure dominance look destined for disaster.
Its strengths are primarily in the SaaS/PaaS space, where acquisitions like Netsuite cement their market positions in segments such as ERP. Its CRM, HCM and SCM segments are also highly leveragable components of its overall cloud business.
Oracle is one of the few companies with such breadth of offering when it comes to business management software, and the results are already there to see despite its slow-footed efforts in the cloud. Oracle’s SaaS and PaaS revenues reached $878 million during the recent quarter, accounting for 10% of its overall revenues. This segment has grown by 81% in constant currency in the first six months of the current fiscal compared to the prior period. In 2016, this segment posted a growth of 52% in constant currency.
Oracle’s quarterly revenue during the second quarter was $9.03 billion with new software licenses accounting for 15% of total sales and hardware products accounting for 11%. These are the two segments that are experiencing sharp slowdowns, but SaaS/PaaS revenues have already reached a level where they can adequately offset the slowdown.
Oracle says that it is targeting $10 billion in annual revenues from SaaS offerings, which means the company should be at or above $2.5 billion in quarterly revenue from this segment to even hit a run rate of $10 billion. It might take two more years to get to that spot, but when that happens, Oracle’s SaaS segment revenues will have gone past the combined sales of new software licenses and hardware products, setting the stage for sustainable growth in revenues for the company.
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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