Editor’s note: Oracle (Nasdaq: ORCL) has very rapidly reinvented itself as a cloud software provider. A year and a half into its formal transition and nearly the entire portfolio is available in the cloud—now the challenge is to translate that same change in revenue, says Technology Business Research analyst Meaghan McGrath.
HAMPTON, N.H. – Inputs have yet to begin driving outputs
Oracle has very rapidly reinvented itself as a cloud software provider. A year and a half into its formal transition and nearly the entire portfolio is available in the cloud—now the challenge is to translate that same change in revenue.
Cloud SaaS and PaaS, Oracle’s primary investment focus thus far, grew 34% year-to-year to $484 million in F2Q16 (C4Q15), reaching more than 5% of corporate revenue. Cloud IaaS, which receives less focus than SaaS and PaaS, grew 6% on a smaller base, to $165 million. Collectively the cloud business barely comprises 7% of corporate revenue.
Oracle’s new software licenses and related maintenance segments hold 71% of total revenue, even as they declined 18% and 2%, respectively over the past year.
Oracle admits its new software licenses will continue to decline at a modest rate in coming quarters, and that Cloud SaaS and PaaS revenue will begin to accelerate as customers begin to exit the initial promotion periods and start paying for the cloud services. Dollar-for-dollar, using F2Q16 figures, cloud will collectively need to scale its quarterly revenue growth by approximately three times to offset license declines. This neglects the continued declines in maintenance revenue that TBR expects will accelerate further as the license customer base that needs support erodes. These trends, until redirected by the expected accelerated revenue growth and improved SaaS and PaaS margin, paint a bleak short-term financial picture for a transition necessary to remain relevant in the long-term. Year-to-year growth of 75% in SaaS and PaaS bookings foretells improvement once this booked business becomes recognized revenue on the income statement.
Oracle extends hardware portfolio to further its cloud push
With few SaaS announcements left to round out its applications portfolio, Oracle’s cloud announcements in F2Q16 were primarily focused lower on the cloud stack, at the PaaS and IaaS layers.
During the company’s annual conference in October, Oracle vowed to offer competitive elastic and dedicated compute instances at the same or lower prices than current IaaS market leader Amazon Web Services—a commitment that TBR believes will support the sale of a complete Oracle Cloud stack to customers, rather than piecemeal services, and drive greater revenue growth in the long-term.
Oracle also went a step further with its IaaS announcements, adding a new security feature at a level that pure-play cloud competitors will have a hard time matching: its own SPARC processors.
The most prominent feature in the new SPARC M7 microprocessor, announced at Oracle OpenWorld 2015, was Silicon Secured Memory (SSM) which brings security down to the chip level. SSM protects against threats by isolating what memory an application can request when it is coded, and assigning that memory a key that matches one given to the program; if the program key does not match the key for the memory it tries to request, it will be denied and flagged as an unauthorized request in the Oracle Audit Vault.
This flagging process also allows programmers to find bugs during coding. In pushing down security into the chip level, Oracle notes the data that any application would pull is secure because the database and memory are secure; therefore, little need exists to protect each application. This serves as a more durable means of security as maliciously modifying the hardware proves more difficult than interfering with applications, while it also lets encryption run at memory speed. Moreover, this level of security, when implemented in a cloud-enabling data center (such as Oracle’s) can flag malicious attacks, a unique value not available from other cloud vendors.
(C) TBR
