Oracle’s executive dream team predicted a big groundswell (sorry) in the company’s cloud computing business. That’s the good news. But it will happen late this fiscal year. That’s the bad news for a company coming from behind in the fast-growing cloud computing market.
In response to a question on the company’s first-quarter earnings call, Oracle (ORCL) co-chief executive Safra Catz said she thinks by the latter part of this fiscal year, the cloud business profits will start to grow.
Catz said she expects profit margins on cloud software—where customers typically pay as they go month to month— to rise from 40% now to 60% by the end of this fiscal year to 80% the year after that.
Given that cloud leader Amazon(AMZN) Web Services boasted 21.4% margins for its most recently reported quarter Catz made some mighty big promises there.
But what else would Catz say? For decades, Oracle has pretty much printed money selling databases and enterprise software that customers buy, deploy, and run themselves. It is a very sticky model, especially in the database market where companies are loath to switch brands for fear of disrupting their meat-and-potatoes sales and inventory operations. You know, the things that make money.
But that model is under pressure as more companies tire of buying, upgrading and maintaining reams of hardware when they can instead rent that capacity from Amazon Web Services, or Microsoft(MSFT), or one of the telcos that offer rentable “infrastructure as a service.” Basically a rentable data center.
Once those customers weigh that move, they might just also consider transitioning to a new and less pricey database. Stranger things have happened.
That’s why Oracle wants to ease the way for its customers to its version of cloud. Oracle’s worry is customers who gripe about its hard-charging sales tactics and prices for both the software licenses themselves, upgrades and maintenance, might just use Oracle’s database on Amazon Web Services (where it is available). Or, nightmare scenario, move off of Oracle’s database altogether to something less pricey.
Oracle executive chairman and CEO Larry Ellison said the company is pedal to the metal to build out infrastructure to sustain all that work.
Oracle has deployed its cloud technology in 19 data centers in 14 countries, he said, adding:
“We have upped our data center service capacity from 0.5 megawatt to 45 megawatts. That is up 90X, Not 90% but 90 times increase in our data center capacity. And we’ve installed over 40,000 physical devices, over 100,000 virtual machines and over 8 petabytes of storage. We are entering the rapid scale-out phase.”
A megawatt is a unit of electricity that is an indication of data center capacity. According to Data Center Knowledge, one megawatt can power the equivalent of 4,000 servers.
Those are impressive numbers from Oracle until you wonder just how many “devices” AWS and Microsoft have installed. Those vendors don’t specify but I’m guessing it’s a lot more than 40,000. Maybe even “90X” more.
On the call, Oracle broke out its cloud software business into a three buckets. The first two, software-as a-service a la Salesforce(CRM) -like subscription applications for workers and platform-as-a-service software for developers building applications, saw revenue up 34% year over year. The third bucket, the aforementioned infrastructure as a service rose 15% to $160 million.
If you look at the chart, you see Oracle’s dilemma. It rules in enterprise software that runs on-premises, logging $3.1 billion in sales this quarter. But that was off 33% from nearly $3.8 billion from a year ago. This is a hugely profitable, business, but also one that’s on the wane.
For the first two cloud categories, Oracle logged $416 million in revenue, up 29% year over year. So it’s growing fast but with lower margins, which is why Catz’s 80% margin promise is interesting.
Overall for the period ending August 31, 2015, Oracle reported $1.75 billion, or 40 cents a share, in profit, down from $2.18 billion, or 48 cents a share, for the corresponding quarter last year. Total revenue was $8.45 billion off nearly 2% year over year.
For more on Mark Hurd, Oracle’s other co-chief executive officer, check out the video below.
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