This content is currently locked.

Your current Info-Tech Research Group subscription does not include access to this content. Contact your account representative to gain access to Premium SoftwareReviews.

Contact Your Representative

Or Call Us:
1-888-670-8889 (US/CAN) or
+1-519-432-3550 (International)

Comprehensive software reviews to make better IT decisions

Oracle’s Q2 FY20 Earnings Are Good, but Top Line Growth Remains Stagnant

Oracle just reported slightly better-than-expected Q2 FY20 results with revenues of $9.6 billion for the quarter (up 3% year-over-year). Despite the substantial revenue numbers and high-growth areas such as Oracle Cloud (30% growth rate), Fusion ERP (37% growth rate) and Autonomous Database (200% growth rate, but off a small base), it is unclear when these market segments will start to accelerate revenue growth materially.

Oracle’s Precarious Position

Oracle’s core challenge is the increasing velocity with which alternatives to its primary product offering, the Oracle Enterprise Edition relational database, are gaining traction in the marketplace, especially with cloud-native applications. More and more organizations see the value in building a diverse set of database capabilities such as those offered by NoSQL, Hadoop, Graph, and Columnar database models. Additionally, many open-source models have emerged within the relational database segment seeking to challenge Oracle’s dominant position. At this point, Oracle still reigns supreme, but competition is knocking on the door.

Source: DB-Engines Ranking

Oracle’s response to the rise of competition in the database market, as well as the overall cloud movement, has been sluggish, to be generous. Oracle will likely continue to lose market share to the likes of AWS, as Amazon’s cloud business continues to grow at a blistering pace. This will be tempered by a still-expanding database management market overall, however, allowing Oracle to maintain some semblance of net growth. It is likely that that the growth rates in the non-relational database markets will outpace the traditional relational database market segment over the next several years. Still, the massive size of the current relational database market will keep Oracle’s legacy product set highly relevant.

On the cloud side of the equation, Oracle is and will be playing catch-up to the likes of Amazon, Microsoft, and Google for years to come, as it was late to the game. While Oracle’s cloud business has maintained a 30% or higher revenue growth rate over the past three years, this is paltry when compared to higher growth rates off of more massive bases for the cloud leaders.

Highlights and Observations

While revenue growth was tepid for Oracle, clocking in at 3% year-over-year (YoY) growth, Oracle continues to perform at a high level on the earnings per share (EPS) front, driving EPS growth 12% higher YoY.

The bright spots in Oracle’s revenue growth this quarter center on its ERP segment and associated cloud Software-as-a-Service (SaaS) customer migration efforts, including Oracle Fusion ERP and NetSuite. Oracle’s ERP business alone generates $4 billion in annual revenue, comprising around 10% of Oracle’s overall revenues. ERP is a growth engine, driving 37% YoY growth while NetSuite ERP grew 29% and Fusion HCM up 23%. CEO Safra Catz noted on the earnings call that Oracle was able to close the financials on the quarter in twelve days by using its Fusion ERP solution.

Oracle currently offers both on-premises and cloud ERP solutions. Still, it is driving customers very hard to migrate from legacy on-premises solutions to the SaaS versions of its ERP offerings. Currently, revenue is evenly split between the two deployment models.

Source: Enterprise Resource Planning at SoftwareReviews

Oracle continued to show weakness in the areas of cloud (IaaS/PaaS), license revenue, hardware, and services. Cloud/license revenues declined by 7%, hardware by 2%, and services by 1%. Currently, the outsized performance by the ERP and SaaS solutions are simply not big enough to move the $40-billion annual revenue needle. That being said, Chairman and Founder Larry Ellison noted the following on the earnings call:

“We have a huge lead in Cloud ERP, with over 7,000 Fusion ERP customers and 20,000 NetSuite ERP customers. Our closest cloud ERP competitor is Workday, and they claim to have a few hundred ERP customers. Workday’s lack of success in cloud ERP is creating opportunities for Oracle in cloud HCM. More and more, we’re seeing HCM as being purchased as a part of an ERP cloud application suite. As a result, today, we have more HCM customers than Workday. And we’re beginning to see that same integrated suite strategy beginning to drive our sales of CX customer experience applications in sales and service and marketing. SAP never rewrote its ERP applications for the cloud. As a result, SAP’s installed base is very vulnerable. We’ve already replaced and successfully migrated many midsized SAP customers from SAP to Fusion ERP.”

The key takeaway here is that Oracle must continue to be a master of financial engineering, maintaining a precarious balance between keeping a proper R&D investment profile and ruthlessly managing expenses. All to buy time for ERP to eventually overtake the core database offering as the primary revenue engine of the company.

What about Oracle’s Autonomous Database? Larry Ellison pointed out that customers that adopt the Autonomous Database can avoid costly and catastrophic security breaches such as the recent breach at CapitalOne, which was due to human error. This message carries considerable potential value, and the Autonomous Database bookings growth of 200% shows that Oracle’s message is resonating with some customers. Currently, Oracle is targeting smaller deals for Autonomous to validate the proof of concept with the expectation of expanding these footprints after that.

Recommendations

Invest in understanding Oracle’s cloud roadmap. Oracle will not change its product roadmap for the majority of customers. Oracle clients must ensure they have a clear cloud strategy that extends for several years and aligns with Oracle’s path.
Consider Oracle’s database options early. Investment in on-premises database solutions by Oracle is all but dead: all funds have been diverted to Autonomous Database, which is a cloud-only product. Clients must decide now whether to move to Autonomous Database or migrate to a non-Oracle database alternative.
Be aware that switching costs can be deadly when leaving Oracle. The primary risk of switching core database systems is the mission-critical data stored with the relational databases. Migrating away from Oracle’s legacy database is time-consuming, costly, and requires precision and care to not corrupt this mission-critical data. Business disruption can be devastating for a database migration gone wrong.
Carefully compare on-premises vs. cloud solutions. Oracle will continue to push clients to migrate from legacy on-premises solutions to its new cloud options, and it will suffocate innovation investments away from the legacy offerings. Oracle clients need to identify the gaps between their existing functionality and the latest cloud products, as they are not like-for-like exchanges.

Bottom Line

Despite a stagnant legacy software business in the database and middleware market segments, Oracle continues to creatively grow revenues, albeit at a modest rate, and drive earnings ever higher. Oracle customers have much to consider when building their IT roadmaps in the areas of database and ERP, with those not willing to embrace Oracle’s cloud vision risking onerous licensing rules, compliance audits, and a lack of product innovation for Oracle’s legacy solutions.