Oracle’s (ORCL, Financial) stock price has surged by more than 30% in the last 12 months as cloud revenue growth was enough to not only offset the revenue decline in other segments but also push the company’s net revenue into growth. But considering the state of the competition in the cloud industry and the size of Oracle’s noncloud revenues,  the question is can cloud alone take care of Oracle’s future revenue growth?
To understand that let’s first look at Oracle’s major revenue drivers. During fiscal 2017, Oracle reported $4.571 billion in cloud revenues, or 12% of its net revenues. Software licenses and product support was the No. 1 revenue driver, accounting for 51% of its revenue followed by new software licenses accounting for 17% while hardware accounted for 11%.
Oracle’s primary business so far has been to sell software and hardware products to enterprises around the world so that they can manage their own infrastructures. But companies around the world are slowly embracing third party-managed infrastructure, or Infrastructure as a Service – IaaS – as offered by cloud service providers (CSPs) like Amazon (AMZN, Financial) Web Services, Microsoft (MSFT, Financial), Oracle, IBM (IBM, Financial) and Google.
Though the Infrastructure as as Service industry has witnessed tremendous growth in the last five years, most large enterprises have preferred the hybrid model of cloud, where the company uses parts of its own infrastructure while using public cloud as well so it can take advantage of new technologies, scalability and so on.
As a result of this, big companies are not shutting down their existing infrastructure investments but moving their new investments toward cloud while smaller companies tend to embrace public cloud due to the cost advantages that cloud computing offers. For Oracle, this has severely dented the growth of its on-premise-focused software and hardware business. Oracle is finding it extremely hard to add more on-premise customers; but it has been able to hold on to its existing on-prem customers.
During fiscal 2017, hardware and new software licenses, the products that are a must for a client that is new to managing their infrastructure – and for existing customers that are expanding their infrastructure – declined by 16% and 12%. That’s a clear indication that Oracle’s new buyer base for on-premise software and hardware products is shrinking in double digits.
But Oracle’s Software License and Product Support, the type of products bought by clients who are managing their existing infrastructure, recorded a 2% growth. That indicates one thing: While Oracle is finding the going tough for new clients for its on-premise products, it is able to hold on to its existing clients very well. That consequently means that if Oracle is able to match the decline in new software and hardware revenues with cloud revenue growth, the company will be able to keep posting positive revenue growth.
That seems to be the simplest way to put it, and on that front, Oracle seems to be on solid footing. Oracle’s total cloud revenue grew 60% to hit $4.571 billion while combined new software license and total hardware revenue declined by nearly 11.5% to hit $10.57 billion. If the current trend of 50%-plus growth in cloud revenue continues, it will be just eight more quarters before Oracle’s total cloud revenue races past the $10 billion mark, reducing the impact of declining new software licenses and hardware revenue on its overall revenue growth.
That can only be seen as good news for Oracle investors and investors thinking of jumping on the Larry Ellison bandwagon.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
