Is this the beginning of the end for Oracle?

Having read the latest Oracle 3rd Quarter financial results released yesterday, it would be easy to think that they are doing quite well. But I’ve spoken to a lot of Oracle clients over the last few months and there is a growing feeling that all is not well in Oracle’s world.

Here’s a summary of yesterday’s financial 3rd Quarter results released by Oracle:

- Total Revenues of $9.8 billion, up 2% year-over-year

- Cloud Services & License Support Revenues of $6.9 billion, up 4% year-over-year

- Fusion ERP Cloud Revenues up 37% year-over-year

- The Board of Directors increased the authorization for share repurchases by $15.0 billion

Yet only two weeks ago, the software giant announced that it is cutting 1,300 jobs in Europe with the losses spanning sales, business development and solutions engineering. Some market analysts are suggesting this reveals that Oracle’s move to be a cloud-based software and services provider is causing structural challenges. And their 2nd Quarter that ended November 30th 2019 Oracle reported a Q2 revenue miss with cloud and on-premise license revenue down 7% year on year. So are these just business blips as they re-align their workforce and shift to being a pure-play SaaS player, or is it another symptom of much more serious underlying issues and demand headwinds?

Consider this:

·        In its financial statements, Oracle now bundles license sales with cloud sales to hide the underlying trend that less people are buying their on-premise perpetual software. While that trend in itself won’t come as a surprise to anyone, it does hide a double whammy: less license sales also means less on-going annual maintenance revenue (their cash cow).

·        They spent $48 billion on acquiring various companies since 2005 yet they have almost flat revenue growth.

·        Many of their customers, as well as many in the financial market, are questioning their product strategy and increasingly aggressive sales tactics

·        They have increasing competition on core products like Databases, ERP, CRM and HR as they struggle to get their clients to move to their Cloud versions

·        They are facing multiple legal lawsuits for allegedly hyping Cloud sales

·        Third party support continues to erode their profitable annual maintenance cash cow

·        Oracle was excluded from bidding for the $10 billion US JEDI (Joint Enterprise Defense Infrastructure) cloud contract as allegedly they couldn’t meet the basic availability and scalability requirements

Taking all this into account suggests that maybe the software giant Oracle is struggling and the future for them is not as rosy as they may want us all to believe. Like tech giants in the past that have faded away, is Oracle at a tipping point?

For many years, Oracle has enjoyed fair-weather sailing, growing quickly to become one of the largest software companies in the world. Oracle software now helps power many of the world's biggest businesses and Oracle enjoys annual revenues of some $39.5 billion. With over 400,000 clients and 100 of the Fortune 100 companies on board, clearly Oracle has been selling software that businesses wanted.

But despite the strong and often "embedded" nature of Oracle products, the software marketplace is evolving quickly and Oracle is not immune to the changes. Disappointing financial results, revenue erosion from the burgeoning third-party support market, the increasing use of alternate database engines from SAP and open source products like MariaDB, and legal action over sales practices and cloud sales claims could be the perfect storm that takes the wind out of Oracle's sails and maybe even becalms the software giant.

So let's look a little more closely at some of the headwinds they face:

Financials

Ignoring the recent whole of market dip due to the global worries over Coronavirus, Oracle’s share price over recent months seems to indicate that the market is happy with Oracle’s activity. But it has been claimed in some financial circles that Oracle’s share price has been held up in recent years not by revenue growth but by the aggressive share buy-backs Oracle has done to diminish the number of shares in the market – indeed, just look at the latest financial announcements yesterday that Oracle’s Board of Directors increased the authorization for share repurchases by another $15 billion.

If we also take a closer look at their financials we can see that Oracle’s revenue is increasingly underpinned by just two product categories – perpetual license maintenance and cloud subscriptions. Their other categories – services, hardware, and new license sales have fallen by 39% since 2013. In 2013 new licenses accounted for over $10 Billion in revenue – in 2019 it was just under $6 Billion and if Oracle aren’t selling as many new licenses then they’re also not opening new lines of perpetual license maintenance and support revenue.

Cloud subscriptions and perpetual license maintenance contributed 67% of revenue in 2019, compared to just 41% in 2011. And with overall revenue growth of just 11% since 2011 that means that cloud subscriptions are vital to Oracle keeping investors happy.

Oracle’s Cloud is struggling

A latecomer to public cloud infrastructure services, Oracle trails behind Amazon, Microsoft, and Google in revenue. Oracle’s Chairman famously spent several years dismissing the cloud as inconsequential to enterprise computing. Once he noticed its success with rivals like Salesforce and Amazon Web Services (AWS), Oracle was left playing catch up. Now many application development and delivery (AD&D) pros are confused or dismissive about Oracle's value as a vendor of public cloud services. And vendors like Salesforce, SAP, and ServiceNow are shifting to run on public clouds like AWS and Azure rather than proprietary clouds like Oracle’s Cloud Infrastructure (OCI).

Back in 2018 Dan Woods wrote a revealing article in Forbes magazine, about Oracle’s cloud troubles. Since then nothing has improved the situation and Oracle has backed off its ambition to challenge Amazon or Microsoft as a full stack public cloud platform provider. And the latest announcement last month about Oracle’s 2nd generation of Cloud as a more ‘secure’ cloud is unlikely to stir the market in its favour. The argument that Oracle is substantially more secure than AWS or Azure doesn’t hold water. Oracle’s announcement had the feel of a last throw of the dice to try to stave off the hard charging Amazon and Microsoft whose cloud platforms are getting most attention these days.

Lawsuits further reveal Oracle’s cloud and sales woes

Currently, Oracle faces various class action lawsuits relating to their cloud sales claims. The evidence in these cases seems to be quite strong, and even if they don’t end up with a great deal of financial damage, the impact on Oracle’s reputation will be hard to forget.

An investor lawsuit from the Rosen Law Firm in the US claims Oracle has been making misleading statements about its cloud revenues and has also been improper and coercive sales and audit tactics to boost cloud revenues. They see questionable sales tactics used to flip an audit bill into ‘new’ cloud revenue leading analysts to question whether it now means Oracle may have a lot of unused cloud capacity as the ‘sales’ of cloud are not real and have not been taken up by clients as they only signed for it to avoid a heavier audit bill. Another lawsuit from the City of Sunrise Firefighters pension fund in the US makes similar claims against Oracle.

And the UK based ITAM Review recently published two excellent articles on Oracle’s legal troubles. The first article examines another lawsuit and the most recent legal action from the German Union Asset Management Holding AG. In a separate piece they outline anecdotal evidence collected from their readers on Oracle’s lawsuit woes which appears to provide further damning evidence of Oracle artificially inflating their cloud sales through dodgy deals and spurious audit and sales tactics.

Oracle has Database troubles too

Oracle’s key product, it’s Database solution, has underpinned the Company for years. Offering robust technology, Oracle became the #1 database of choice for many companies over the years. In addition, Oracle has enjoyed many years of profitable extra revenue from charging annual maintenance on their databases – so anything that diminishes database sales obviously then diminishes their follow-on maintenance and support revenues too.

But the world is changing and databases from the likes of SAP and Microsoft, along with a raft of fast growing open-source databases such as MariaDB and PostgreSQL, are eroding Oracle’s once dominant database space. Oracle database may still (just) be the #1 database in use in the cloud today, but Developers now tend to avoid proprietary expensive databases like Oracle’s and prefer to write new Apps on open source databases. Oracle does have their own (free) open source database – MySQL – but Oracle doesn’t like to push it too hard as some clients may prefer it over Oracle’s premium priced database product.

As an example of what’s possible, Amazon AWS finally switched off use of all its 7,500 Oracle databases in October 2019. As AWS CEO Andy Jassy said: "The world of the old-guard commercial-grade databases has been a miserable world for the last couple of decades for most enterprises... Databases like Oracle and SQL Server are expensive, high lock-in and proprietary”. And another example of a client who jumped ship to avoid Oracle’s high costs is Financial Network in the US.

Companies like MariaDB are happy to show cost comparisons between running their database compared to Oracle; the last chart I saw showed Oracle costing 40x more than the MariaDB equivalent!

Third party support companies are eroding Oracle’s annual maintenance cash cow

It seems that Oracle enjoys something in excess of 90% profit margin on what they charge for annual maintenance and support for their on-premise software. While this is a cash cow for Oracle that for years has funded their growth and paid handsome dividends to investors, it is now under serious threat. In 2017 (the last full year that Oracle clearly published annual maintenance and support revenues), it pulled in over $19.3 billion in revenue from its support operations, while spending just over $1.05 billion to provide that support. Clearly it’s a very profitable cash cow.

I was writing about the benefits of third party software support back in 2012. Since then many articles have been written by Forrester and other market analysts.

Oracle’s high software maintenance and support costs regularly invoke inquiry calls at Forrester, as Oracle's customers question whether they are getting value for money or are just helping fill Oracle's deep pockets. One such third party support company, Rimini Street, has become a market leader in this space by offering to cut Oracle’s support and maintenance costs by 50% or more. To date, Rimini Street has saved clients nearly $5 billion in total maintenance costs since the Company’s inception! And other third parties operating in the Oracle space such as Support Revolution and Spinnaker Support are also offering similar services and further expanding the third party software support market. What was once a minor irritation to Oracle has now become a serious headache.

So what does this all mean?

I was speaking with some Oracle clients the other day and mentioned to them that I was planning to write in this article. And the consensus in the room was that Oracle is indeed struggling. As Oracle tries to shore up its numbers, it has increasingly been looking for ways to grab cash sooner rather than later; one example being their pushing Unlimited License Agreements (ULAs) and the even more strange and aggressive Perpetual ULA (PULAs). Another example is Oracle’s move to monetize Java - it used to be free but since 2019 Oracle is charging for key elements of it which is making some enterprise clients look at alternatives like Azul Systems or IBM Red Hat.

Oracle is a giant in the software industry and has not grown to the size it is without having weathered competitive and revenue pressures before. But with so many headwinds at the moment, they must be feeling huge pressure. Could it be we are seeing the beginning of the end for them?

Final take away - with Oracle’s financial year end approaching on May 31st, now is a good time to be negotiating with Oracle if you are facing a contract renewal or planning on buying more products from them. They want your business and they need it now – so make sure you drive a really hard bargain before you part with your precious cash.