Oracle (NYSE:ORCL) has been busy beefing up its cloud computing portfolio ever since its founder Larry Ellison openly challenged Amazon’s (AMZN) dominant position in the public cloud infrastructure market more than a year ago, at the OpenWorld conference in 2016. A lot of things have changed since that time, but we’re specifically going to look at a few recent developments that will give Oracle a major boost in the private/public/hybrid cloud segments to find out if there’s a promising upside considering current share price.
First, let’s look at Oracle’s announcement of adding 12 more data centers. About a week ago, on Monday, February 12, 2018, Oracle issued a statement saying it will open data centers in North America, Europe and Asia, with the bulk of them in Asia. Last year, the company added three data centers, more than doubling its data center footprint and bringing it to a total of 29 “Regions.” The new data centers will take that up to over 40.
Is that a lot? Not as many as the 53 “Availability Zones” that AWS has, with plans to add another 12. But it almost matches the 42 Regions that Microsoft (MSFT) will soon have, with 6 being added to the current 36. IBM (IBM) has the most, at around 60, but only 33 of those are dedicated to IBM Cloud.
For Oracle, this is a significant move because it will eventually have a presence as widespread as its key competitors in cloud.
Why Cloud Infrastructure Growth is Key for Oracle
Although Oracle’s SaaS (Software as a Service) business is the fastest growing segment in terms of revenue, cloud IaaS (Infrastructure as a Service) is the most critical area of growth. One of the biggest reasons for that is because companies usually prefer having their infrastructure and software served and managed by the same vendor. A study by Saugatuck Technology a few years ago showed that 83% of companies prefer a single-vendor solution, with the following being the conclusion of that study:
“As cloud solutions get more complex and deeper into the enterprise, the trend toward single-vendor, integrated business suites is clearly taking root, across all solution categories.”
Taken in tandem with Oracle’s SaaS strength in Enterprise Resource Planning and Human Capital Management, what you have is a robust single-vendor offering in enterprise cloud solutions. That’s one of the biggest reasons to grow its IaaS capabilities.
Another major move is the recently launched Oracle Autonomous Database Cloud powered by Oracle Database 18c. The service level agreement for this offering promises a reliability and availability percentage of guarantees 99.995%. With no manpower or manual performance tuning required, its unique selling proposition is a 50% cost reduction for the client. Databases are already Oracle’s biggest strengths, and the company is playing to those strengths, but this time cloud is the new battleground.
The most recent big move is the company’s announcement of its intent to acquire Zenedge, a 4-year-old startup that specializes in hybrid cloud security. According to Oracle’s FAQ page on the upcoming acquisition:
“Zenedge expands Oracle Cloud Infrastructure and Oracle’s DNS (Domain Name System) capabilities, adding innovative application and network protection that augments existing Oracle security services and partnerships. Together, Oracle and Zenedge will allow enterprises to adopt cloud services without compromising performance, cost, control or security through an expanded Oracle Cloud Infrastructure platform.”
In light of recent cyber attacks and the $1.3 million average cost of a cyber attack in the enterprise segment in 2017 (up 11% over the prior year), cybersecurity is a big consideration when a company moves to the cloud. With Oracle pushing hard to transition its own on-premise clients to public and hybrid cloud deployment models, bolstering its already-strong cloud cybersecurity capabilities is not only a good tactic but an essential one.
All of these moves will support Oracle’s IaaS growth because they focus on three important aspects of any cloud offering: pricing, availability and security.
What this reiterates is that Oracle is doing the right thing: stepping up its focus on IaaS growth for the foreseeable future. As of Q2-18, Oracle only made 4% of overall revenues from its infrastructure and platform services, while cloud-delivered software accounted for 12% and is growing more than twice as fast as the other cloud segments: Oracle only managed to grow IaaS revenues by 21% over Q2, compared to the 55% growth posted by the SaaS segment.
Let’s also not forget the fact that there’s still a big noose around Oracle’s neck in the form of software license updates and product support, which still contributes a little more than half of all revenues. Although that segment isn’t showing the kind of decline that you’d expect in a market that’s rapidly moving to the cloud, the fact that new software licenses growth came in flat means that the faster IaaS revenues grow, the better for Oracle.
But we’re not ignoring the fact that such growth will come at a cost. The company still boasts a respectable operating margin of 32% as of Q2, but that margin could come under some pressure as Oracle invests in data centers over the next several months and explores more acquisitions to boost its IaaS revenues.
The recent moves by Oracle aren’t necessarily going to give it a big boost on the new client acquisition front, but they will most certainly help the company transition existing legacy clients into cloud. With on-premise, hardware and services revenues making up 84% of total revenues, this is and should be a top priority item for the tech giant on its journey toward a cloud-heavy revenue composition.
Oracle’s stock has been on a bit of a wild ride since its Q2-18 earnings came out and is currently trading at around the $50 mark. With a P/E ratio of around 22, Oracle certainly looks attractive considering its long runway for cloud infrastructure growth.
