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Will Oracle’s Cloud Business Take Off?

Posted on Wednesday, Sep 23rd 2015

The worldwide SaaS enterprise applications market was worth $22.6 billion in 2013 and is expected by IDC to increase to $50.8 billion by 2018, representing a CAGR of 17.6% for the period. Overall applications market in 2013 was $135.9B. From 16.6% in 2013, SaaS is expected to account for 27.8% of the worldwide enterprise applications market. The cloud has been a key focus for Oracle for some time now. However, it is a tough market to crack with tough competition and low margins. Will Oracle be able to crack it?

Oracle’s Financials
Oracle’s (NYSE: ORCL) first quarter revenues were down 2% over the year to $8.4 billion, missing the analyst revenue estimate of $8.53 billion. EPS was $0.53, ahead of the market’s projected earnings of $0.52 per share.

By segment, total cloud revenues were up 29% to $611 million, compared to analyst estimates of $630 million. Cloud SaaS and PaaS revenues were up 34% to $451 million and Cloud IaaS revenues were up 16% to $160 million. Total On-Premise Software Revenues were $5.8 billion, down 4%. Total Hardware Revenues were $1.1 billion, down 3%. Total Services Revenues were up 1% to $862 million. Short-term deferred revenues were $9.1 billion, up 2%. Bookings growth rate was 165% over the year.

Oracle ended the quarter with $56 billion in cash and marketable securities. Net of debt, their cash position is approximately $14 billion.

For the second quarter, Oracle expects revenue to range from a negative 2% to a positive 1% and EPS between $0.63 and $0.66. Analysts expect revenue to decline 0.7% to $9.54 billion and EPS of $0.65.

For the full year, Oracle expects revenue to grow around 50%. SaaS and PaaS gross margins are expected to materially improve in the second half and exit the year at around 60%.

Oracle’s Acquisitions

In August, Oracle announced its acquisition of marketing cloud company Maxymiser for an undisclosed sum. Maxymiser is a leading provider of cloud-based software that enables marketers to test, target, and personalize what a customer sees on a Web page or mobile app, substantially increasing engagement and revenue. Maxymiser optimizes over 20 billion customer experiences per month for brands such as Allianz, HSBC, Lufthansa, Tommy Hilfiger, and Wyndham and has an estimated annual revenue of $30 million. With this acquisition, Oracle hopes to make inroads into the $10 billion marketing cloud space where Adobe is a leader.

In December 2014, they had acquired Datalogix for an undisclosed sum to strengthen their advertising cloud business. Datalogix provides data on offline consumer spending to digital marketers and is estimated to have revenue of $125 million in 2014.

According to Gartner, marketing technology is one of the fastest growing areas of the $1 trillion enterprise software market and CMOs are expected to spend more than CIOs by 2017. There have been several acquisitions in the space and Oracle’s past few acquisitions also focus on strengthening their marketing cloud arsenal. In this space, Oracle had earlier acquired data management platform BlueKai, Eloqua, and Responsys. After its acquisition of Eloqua, Marketo was seen as a probable prospect. Its annual revenue in 2014 was $150 million.

The Cloud Market Landscape

The market is skeptical of whether Oracle’s cloud business can make up for the decline in its legacy business. Its cloud business accounts for just 7% of its total sales, compared to 5% last year. Its cloud revenues amounted to just $611 million in the quarter compared to Salesforce.com’s revenue of $1.63 billion  and Amazon’s $1.824 billion in the recent quarter. Oracle is expecting cloud revenue of $1.5 billion to $2 billion this year while Microsoft’s Commercial Cloud segment has a run rate of more than $8 billion.

Oracle definitely has far to go before it catches up with the leaders in the cloud space. Over the past few years, it has invested heavily in the cloud business and has acquired several companies in various verticals. However, the cloud business typically takes some time before revenues and profitability start to kick in. Till now, Oracle has been in this initial growth phase and investors should be patient during this phase. After all, Oracle has led the database industry for close to 30 years and as analyst Michael Turits, Raymond James puts it,

“it could very well leverage its stack of hardware, apps, middleware, database, and analytics into a leading hybrid cloud offering.”

FBR Capital Markets analyst Daniel Ives says Oracle needs to make acquisitions to fuel growth in its cloud business and convince investors who are sceptical of a turnaround. He adds that Splunk, Tableau Software, Netsuite, and Workday could be game changing acquisitions.

I think new age database competitors MongoDB and DataStax could be interesting prospects for Oracle. According to IDC, the global Big Data market will be worth $16 billion in 2016. While the market is still dominated by SQL-based databases, there is also a rapidly growing demand for the NoSQL databases where MongoDB has a stronghold. DataStax is a real-time Big Data platform built around Cassandra. Read: Interview with Jonathan and Matt on their early stage, and Thought Leaders in Big Data with Billy Bosworth.

In the IaaS space, Egnyte and Druva are potential prospects. According to Gartner, global spending on IaaS is expected to reach almost $16.5 billion in 2015, an increase of 32.8% from 2014. It is expected to grow at CAGR of 29.1% from 2014 to 2019. Like Box, Egnyte operates in the cloud storage space, but it operates a leaner ship and offers an enterprise grade product that can command much higher pricing. It is expected to generate revenues of $100 million this year. Data protection solutions provider Druva is expected to end 2015 with revenue of $50 million.

Oracle’s stock is currently trading at $36.19 with a market cap of $157.52 billion. It hit a 52-week low of $35.14 in August and a 52-week high of $46.71 in December last year.

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