Oracle’s cloud business has entered what CEO Safra Catz called a “hypergrowth phase,” as the company’s combined software-as-a-service and platform-as-a-service revenue grew faster in Q3 FY2016 than even Oracle had projected.
Oracle’s transition to the cloud is paying dividends (this quarter, literally so, at 15 cents a share) as illustrated by a number of customers buying more than one type of service and high renewal rates among existing customers.
Oracle Executive Chairman and CTO Larry Ellison emphasized the breadth of Oracle’s cloud software, platform, and infrastructure portfolio, noting that the company’s cloud revenues are growing much faster than those of its more narrowly focused competitors, Salesforce.com and Workday.
Ellison pointed out that Salesforce, which sells sales, marketing, customer service, and other CRM services, is absent from the largest, fastest-growing SaaS pillar—enterprise resource planning—where Oracle has nearly 2,000 Oracle ERP Cloud customers.
Meantime, Oracle has nearly 10 times as many cloud ERP customers as Workday, which cut its teeth on cloud HCM (human capital management) applications, claims to have. Workday has only financial apps in its ERP portfolio—no procurement, supply chain, logistics, or manufacturing. And Workday doesn’t even play in the huge PaaS market, which includes cloud-based database, application development, integration, data analytics, and visualization tools.
“The breadth of our ERP, HCM, and CRM SaaS product portfolio, combined with the technical superiority of our underlying PaaS cloud services, should enable us to sustain our rapid cloud growth for a long period of time,” Ellison said. “That in turn should make it easy for Oracle to pass Salesforce.com and become the largest SaaS and PaaS cloud company in the world.”
Ahead of Guidance
The company’s SaaS and PaaS revenue in Q3 rose 61% compared with the year-earlier quarter, to $583 million. In her guidance to financial analysts last quarter, Catz had said to expect SaaS and PaaS revenue growth of between 49% and 53% in Q3. (All reported figures are in constant currency to account for the continued strengthening of the US dollar.)
Oracle CEO Mark Hurd laid out the scope of Oracle’s recent SaaS customer wins, emphasizing the continuing opportunity to exploit the “connection rate” between different application pillars, most notably between ERP and HCM and between sales and marketing. It’s an advantage Salesforce and Workday don’t have.
For example, supermarket chain SuperValu, restaurant chain Yum Brands, and Vanderbilt University are new Oracle HCM Cloud and Oracle ERP Cloud customers. LEGO now uses both Oracle Sales Cloud and Oracle Marketing Cloud apps.
Overall, Oracle added 942 new SaaS customers in the third quarter and expanded business with another 783—“an all-time high,” Hurd said.
• Oracle closed 213 new HCM cloud customers in the quarter, including Yum Brands, UK retailer The Co-operative Group, SuperValu, Sisters of Charity Health Systems, and Vanderbilt University. Hurd also called out several HCM customers Oracle has snatched away from Workday, including Southwestern Energy, Fannie Mae, MoneyGram, Molina Healthcare, and BrightSource Energy.
• In ERP cloud, Oracle closed 334 new customers—175 of which didn’t have Oracle on-premises ERP apps—including SuperValu, Yum Brands, American Institute of Physics, Boston Market, Scholastic, Dresser-Rand, University of Kansas, and Vanderbilt University. Hurd called Oracle’s ERP battle with Workday “a slaughter.”
• In cloud customer experience (CX), Oracle landed 465 new customers in the third quarter, including Advantis Healthcare, Kaiser Permanente, and LEGO for Oracle Sales Cloud; and AIG, Citigroup, Coach, LEGO, and Nestle for Oracle Marketing Cloud.
Hurd also noted the high renewal rate on Oracle SaaS subscriptions. Among the SaaS subscriptions yet to come up for renewal are the first sets of ERP and HCM cloud apps, what Hurd called “our stickiest applications.”
What’s more, Oracle’s cloud business is getting ever-more profitable, as the company’s aggressive spending on data centers and other cloud infrastructure tapers off amid rising revenues. Oracle reported that the gross margin from its SaaS plus PaaS business came to 50% in Q3, up from 45% in the year-earlier quarter, and it’s climbing toward the company’s target of 80%. Over the next few quarters, that rising revenue and profitability “will ignite substantial EPS and cash flow growth,” she said.
Even though Oracle has spent the last decade rewriting its entire portfolio of products for the cloud, the company is “not quite at the end of the beginning” of that transition, Catz said, adding: “We feel very good about the progress.”
PaaS may be Oracle’s biggest cloud market opportunity. The company added 1,143 PaaS customers in Q3, bringing its total to about 5,000. That’s a strong start, Hurd said, but with Oracle having 310,000 on-premises database customers, and with the $300 billion dev-test market poised to go all-cloud within 10 years, the sky’s the limit on PaaS conversions. “This business is going to be extremely good for us,” he said.