Oracle Still Not Keen on SaaS

Oracle Corporation (NASDAQ: ORCL) reported its Q4 and FY 08 results on June 25. In a typically strong quarter, Q4 revenue was up 24% to $7.2 billion and net income was up 27% to $2.0 billion. Non-GAAP EPS was $0.47; analysts had estimated $0.44 on revenue of $6.88 billion.

Breaking down revenues by segment, service revenues were up 18% to $1.3 billion and software revenues were up 26% to $6.0 billion. New software license revenues were up 27% to $3.14 billion, with database and middleware new license revenues up 23% and applications new license revenues up 36% (compared to just 7% last quarter, which had sent the stock price down amidst concerns over low tech spending).

The BEA acquisition was closed at the end of April for $8.5 billion, and BEA contributed $93 million to new software license revenues in the quarter.

For FY 08, revenues were up 25% to $22.4 billion and net income was up 29% to $5.5 billion. Software revenues were up 26% to $17.84 billion while service revenues were up 21% to $4.6 billion.

For Q1 09, Oracle expects revenue growth of 18 to 20% and non-GAAP EPS of $0.26 or $0.27. Analysts had estimated earnings of $0.27 per share on revenue of $5.37 billion. New software license revenues are expected to grow by 10 to 20% in a typically slow quarter. BEA is not expected to bring more than $50 to $60 million in new licenses.

Oracle’s on-demand business turned profitable for the first time and grew 25% y-o-y but still accounts for just 3% of the overall revenue. On-demand contribution will continue to remain at this level unless it can match Oracle’s overall growth rate. In the earnings call, CEO Lawrence J. Ellison stuck to his view that SaaS is not profitable. He gave the example of Salesforce.com (in which he is a major shareholder) saying, “If you look at the leader, Salesforce.com, they don’t make very much money and they’ve been at it for almost ten years. It’s hard to point to any software as a service provider that’s doing a good job of improving their profitability. I think that’s what we are focused on before we scale the business. The last thing we want to do is have a very large business that is not terribly profitable and drags our margins down.”

The subtext of Ellison’s point is that he will wait and watch, and let other pureplay SaaS providers do the dirty work of experimentation, fine-tuning, scaling, etc. He will simply acquire players that turn out to be profitable and impressive.

I do not, however, agree with the Salesforce.com example, because that company could have been quite profitable much sooner had they been less ambitious and not followed a platform strategy.

The point at which they can leverage that strategy and acquire a large portfolio of companies that are built on their platform, they will be extremely profitable.

My guess is, Benioff has no inclination to sell Salesforce.com to Larry. Hence, the company with the greatest profitability potential is out of Larry’s otherwise extensive reach.

Oracle is trading around $21 with a market cap of around $110 billion. It hit a 52-week high of $23.57 on June 3.