Oracle Corporation Is a Better Cloud Play than Pure-Play Cloud Companies

Oracle remains solidly profitable compared to many pure-play SaaS companies which are not. The company's other businesses will help insulate it against any losses as its cloud business matures.

Jun 26, 2014 at 1:31PM

Investors were not amused when Oracle (NYSE:ORCL) reported less than stellar fourth-quarter and full-year fiscal 2014 results that sent its shares tumbling. Chief executive Larry Ellison tried to explain to the investing world why the company's profit miss was actually a positive sign of its gradual transition into a cloud-centric revenue model, but it seems that the Street refused to buy the story.

For context, Oracle reported fourth-quarter revenue of $11.32 billion, a 3.4% year-over-year improvement. But, analysts were looking for $11.48 billion. The worst part: net income was down 4.2% to $3.65 billion. The company's saving grace, however, was its strong share repurchases, which helped keep EPS unchanged at $0.80.

Cloud revenues
Cloud growth was the operative word during the earnings call. Oracle's cloud SaaS and PaaS revenues were up 25% to $327 million. Cloud infrastructure, or IaaS, grew at a more modest rate of 13% to $128 million. According to Mr. Ellison, that's good because SaaS and PaaS typically command margins in the 40% to 50% range, while IaaS margins are lower. The company added 870 new cloud customers in the fourth-quarter alone.

For the full-year, SaaS and PaaS grew 24% on a GAAP  basis, and 20% on a non-GAAP basis, to $1.1 billion. IaaS revenue was up 1% to $456 million.

Where Oracle trounces pure-play cloud companies
Overall cloud growth (SaaS, PaaS, and IaaS) for Oracle clocked in at 17.25%. So how does Oracle's cloud growth stack up against the SaaS industry leaders such as Workday (NYSE:WDAY), Cornerstone OnDemand, NetSuite and Salesforce.com (NYSE:CRM)?

Oracle's fiscal year 2014 ended on May 31, 2014, while Salesforce's fiscal year 2014 ended on Dec. 31, 2013. Workday's, Cornerstone OnDemand's, and NetSuite's fiscal year 2014 will end on Dec.31, 2014. We shall, therefore, compare Oracle's and Salesforce's full-year 2014 results with the full-year 2013 results for Workday, Cornerstone OnDemand, and NetSuite.

Company

SaaS Revenue (millions of dollars)

% SaaS Revenue Growth

Workday

468.9

71%

Cornerstone OnDemand

185.1

57%

NetSuite

414.5

34%

Salesforce

4,070

33%

Oracle

1,100

24%

Source: Workday 10-K, Cornesrstone onDemand 10-K, NetSuite 10-K, Salesforce.com 10-K, Oracle 10-K

Salesforce is one of the most mature SaaS companies. Its revenue has been growing consistently at a 30%-plus annual clip over the last three years or so. Meanwhile, Oracle's cloud subscriptions grew just 4% in fiscal 2013. Its 17.5% cloud growth in fiscal 2014, is therefore, a huge improvement.

Oracle might be a latecomer to the cloud business, but its cloud revenue is already much higher, in absolute terms, than that of growth leaders Workday, Cornerstone OnDemand, and NetSuite. It's quite likely that Oracle's cloud growth will hit a plateau around Salesforce's 30% annual clip.

Let's now look at the main reason why Oracle is a much better cloud play than the other four SaaS companies.

Sales and marketing expenses as a % of revenue
SaaS companies spend very heavily on sales, marketing, and customer management functions so as to rapidly grow their customer base, and also to reduce customer churn. The big difference between old-line software companies and SaaS companies lies in the timing of their sales and revenue expenses in relation to their revenue.

For traditional software companies which sell perpetual licenses, their marketing expenses and revenue are almost perfectly aligned. But for SaaS companies, the story is very different. Customers sign up to use a company's software on an ongoing basis, usually on 12-24 months contracts. This implies that the company spends money on customer acquisition expenses, development and sales of the software, and hosting infrastructure expenses upfront, and the expenses are immediately accrued for. Yet, the revenue comes in gradually as the months roll on.

However, SaaS companies know that if they continue growing their customer base, a time will come when the cash generated from the installed customer base will be enough to cover any new customer acquisition costs, plus any other marketing expenses. The company will then be able to sit back and harvest any incoming cash flow as profits. Moreover, SaaS customers tend to be sticky with low churn rates.

Oracle spent about 24% of revenue as marketing expenses in 2014. Its sales and marketing expenses grew 6% during the year. In comparison, most SaaS companies spend close to half of their revenue, or more, on sales and marketing expenses. This makes it very hard for these companies to turn a profit. None of the SaaS companies mentioned here is profitable, including Salesforce, which has been in business for around 10 years.

Orcl

Credit: YCharts

However, Oracle is lucky in this respect since it's solidly profitable. Its other businesses insulate it from any losses as its cloud business matures.

Although Oracle spent a good amount of money on sales and marketing functions during the fourth-quarter, and the figure was charged to its balance sheet immediately, the revenue benefits will  appear on its balance sheet gradually as the quarters roll on.

Foolish takeaway
Oracle is solidly profitable, unlike many pure-play SaaS companies. Its cloud business is also growing at a healthy pace. This could make it a better long-term cloud play than pure-play SaaS companies.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Joseph Gacinga has no position in any stocks mentioned. The Motley Fool recommends Apple and Salesforce.com. The Motley Fool owns shares of Apple and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers