Oracle's Growing Pains

People at Oracle must sometimes feel like they're living in Mark Twain's reality. After hearing that his obituary had been published in the New York Journal, Twain published a quip for the ages when he wrote, "The reports of my death are greatly exaggerated."

So too with Oracle. Ever since its earnings miss for its first fiscal quarter, a chorus of financial analysts have predicted doom. To be honest, some of Oracle's moves in the market, like its approach to software audits, have not bolstered contrary claims.

Then again, Oracle rarely explains or complains, hewing to what could be viewed as an outdated masculine ethic.

The Sad Truth

Joseph Mwangi, who considers himself a contrarian, last week published his analysis, "The Reason(s) Why Oracle's Growth Story Is Crumbling," on Seeking Alpha.

He cited several reasons for his conclusions. Oracle's latest quarterly earnings report disappointed. Also, revenue growth slowed down considerably, with lackluster growth by the pivotal cloud segment assigned much of the blame.

For reporting purposes, the company had lumped "the cloud business together with the legacy on-premise business, suggesting all is not well at the pivotal segment," Mwangi noted.

Because Oracle has not been pursuing M&A activity as robustly as it did previously, and instead has been buying back stock, the company has not been growing revenue, he claimed, even if that growth was inorganic.

Mwangi's complaint that Oracle has been gouging customers seemed based on an out-of-context quote from Oracle CEO Mark Hurd, whom he erroneously referred to as "Mike" in his article.

Hurd's comment: "When a customer who is on-prem paying us support moved (sic) to the cloud, they pay us more money. They don't pay us one to one, they don't pay us two to one, they pay us more like three to one. In some cases more than three to one."

Let's try to add some context. When I have been in audiences listening to Hurd, he usually has couched this idea in terms of existing customers with paid-for licenses buying Software as a Service, which bundles software, maintenance and service into a single cost paid over some time interval, such as monthly or over multiple years.

Also, the quote refers to accumulated revenues over a contract term vs. the cost of support for an already licensed application.

However, all of this is a side show. The core issue is that no matter how much lipstick you put on this pig, the sad truth is that cloud computing is a form of commoditization of IT.

Nowhere to Hide

During any commoditization, a company faces margin erosion, leading to reduced profits. If you try to compare multiple companies in the throes of converting from on-premises to cloud computing, you are liable to get skewed results. That's because the longer a company is in the moving-to-the-cloud tunnel, the less bad its earnings seem.

This is because financial comparisons often are made between a current year and the prior year. Sometimes we see five-year comparisons, but that's relatively rare. The more cloud customers you have, the stronger your revenues look. That's due to economies of scale and because invidious comparisons with your former glory are firmly in the history books.

Oracle is in the unenviable position of being the last of the big enterprise software vendors to attempt the switch. It is also one of the biggest software companies in the world, making its transition hard to disguise.

Moreover, the company is very much in the middle of things, still building out cloud data centers and trying to get its customers to move to them. That's not an easy job, and it's one that the C-suite all said would take 10 years or more, when it got going in earnest a couple of years ago.

As customers reach the point of beginning to consider cloud computing, many have not been doing the prudent thing and asking what else is out there. That makes for a dangerous time for Oracle, and the company is trying to parry by offering half measures, such as hosting existing applications on its infrastructure with no penalty for moving a license. All of this has to get sorted out. Hence the 10-year window.

My Two Bits

Oracle is transitioning while commoditizing, and it will lose some revenue as customers gravitate to cloud systems. At some point, there will be critical mass in the company's cloud systems, and it will be able to reduce its exposure to R&D for both sets of products and all the overhead that implies.

So things will look better eventually, but Oracle isn't there yet. The company continues to take its lumps despite the financial community's nearly 20-year experience with the evolution of cloud computing