Oracle heads into its annual Oracle OpenWorld event in San Francisco next week with impressive cloud momentum, reporting that first-quarter FY2017 revenue from its combined software, platform, and infrastructure cloud services grew 59% from the year-earlier quarter, to $969 million.
Revenue from Oracle’s two fastest-growing cloud businesses—software as a service and platform as a service—rose 77% in Q1, to $798 million, thanks to thousands of customer wins. The first quarter marks the seventh consecutive quarter in which organic growth rates for Oracle’s SaaS and PaaS businesses have accelerated.
What’s more, those SaaS plus PaaS revenues are highly profitable, generating a gross margin of 60% in the quarter compared with 39% a year ago. Oracle CEO Safra Catz said she sees those margins continuing to rise this fiscal year, eventually moving toward the company’s 80% target.
“We overachieved again in the cloud, especially in the United States,” Catz said on the company’s September 15 earnings call with financial analysts. “As you all know, we have pivoted the organization to go after the cloud, and we are outperforming even our most aggressive expectations.”
Oracle CEO Mark Hurd said Oracle is on track to sell more than $2 billion of SaaS and PaaS annually recurring revenue. “We believe this will be the second year in a row that Oracle has sold more SaaS and PaaS than any other cloud services provider,” he said in a statement.
In the first quarter alone, Oracle closed deals with 776 new SaaS customers, including 344 new enterprise resource planning (ERP) and related enterprise performance management (EPM) cloud customers, Hurd said on the earnings call.
“That’s more ERP customers than Workday has sold to in the history of their company,” Hurd said. And more than half of those new ERP/EPM customers, including Adventist Health, Saks Fifth Avenue, Texas Instruments, Tesco, and UCLA, had never purchased an Oracle application before, he said.
Oracle’s biggest ERP competitor is now Workday, Hurd said, not on-premises application market leader SAP, which Oracle rarely faces in cloud RFPs. “We think there's the possibility for a relatively sizable market share shift over the years as we move forward,” he said.
Oracle also closed 2,032 new PaaS customers in the first quarter, bringing its installed base there to about 11,000. As the PaaS business matures, Oracle sees the opportunity to package those database, integration, application development, and other services with its SaaS services.
Oracle also sees PaaS and infrastructure as a service (IaaS) as complementary. The company’s IaaS business, which includes compute, storage, and networking services, grew 7% in the first quarter, to $171 million, as the company closed on 1,671 new customers.
Oracle Executive Chairman and CTO Larry Ellison previewed Oracle’s next generation of IaaS offerings, which the company plans to announce at Oracle OpenWorld next week. Those services will deliver twice the compute power, twice the memory, four times the storage, and ten times the input/output speeds (at a 20% lower price) compared with offerings from Amazon Web Services, Ellison said.
Those performance and price advantages, he said, should help Oracle move its IaaS growth rates closer to those for its SaaS and PaaS businesses. “IaaS represents a huge new cloud opportunity for Oracle to layer on top of our rapidly growing SaaS and PaaS businesses,” Ellison said.
Overall, Oracle’s net income in the quarter rose 5%, to $1.832 billion, on 2% higher revenue of $8.595 billion. Its total on-premises software revenue was flat, at $5.822 billion.
The Oracle executives attributed the company’s cloud momentum to several factors: a larger, better-trained cloud sales force; more reference customers; a potential customer base that’s more cloud-aware; a broader and more mature portfolio of cloud products; and a new Oracle program that simplifies the cloud purchasing process for customers.
Ellison contrasted Oracle’s SaaS gains to Microsoft’s. Whereas much of Microsoft’s SaaS growth has come from migrating existing customers of its on-premises Office applications to cloud versions (Microsoft’s Office 365 commercial business grew 54% in the company’s latest quarter, far faster than any of its other SaaS businesses), most of Oracle’s cloud growth is with new customers, including startup and midsize businesses, Ellison said.
Oracle’s massive installed base of database customers has barely started moving to the cloud, Ellison noted, calling this a huge market opportunity, one that will likely gain momentum with the upcoming release of Oracle Database 12c R2. “Release 2 is going to move customers to the cloud more quickly than they otherwise would,” he predicted.
Safe Harbor Disclaimer: Statements in this article relating to Oracle’s future plans, expectations, beliefs, intentions, and prospects, including statements regarding our expectations of future growth in Oracle’s SaaS and PaaS gross margins and recurring revenues; the introduction of new products; possible future shifts in market share; and the opportunities to grow Oracle’s IaaS business, are “forward-looking statements” and are subject to material risks and uncertainties. Many factors could affect Oracle’s current expectations and actual results, and could cause actual results to differ materially. A discussion of such factors and other risks that affect Oracle’s business is contained in Oracle’s Securities and Exchange Commission (SEC) filings, including Oracle’s most recent reports on Form 10-K and Form 10-Q under the heading “Risk Factors.” These filings are available on the SEC’s website or on Oracle’s website at http://www.oracle.com/investor. All information in this article is current as of September 16, 2016, and Oracle undertakes no duty to update any statement in light of new information or future events.