The $3 Billion Reason Why Oracle Is Nearing Its All-Time High

Oracle larry ellisonREUTERS/Robert GalbraithOracle CTO Larry Ellison.

Oracle’s stock is up more than 8% Thursday to over $US44, after the company reported better-than-expected sales and profits Wednesday.

That’s the highest the stock has been in years, and it approaches its all-time high of $US45.46 from July 2000, during the heady days of the internet bubble.

The reason why investors are so giddy? To paraphrase Meghan Trainor: “It’s all about that cloud, ’bout that cloud …”

Oracle will sell “well in excess of $US1 billion” of new annual cloud subscriptions next year, chairman and CTO Larry Ellison said during the quarterly conference with analysts. That $US1 billion in new bookings is in addition to the $US2 billion in cloud revenue it is already on track to earn this year (in the current quarter, it earned $US516 million from cloud services).

So by the end of next year, Oracle’s cloud business should be on a $US3 billion annual run rate, well on its way to hitting the major industry milestone of $US1 billion per quarter.

The $US4 billion mark is a major milestone for cloud-computing companies. Microsoft in November said its cloud was on track to be a $US4.5 billion business next year. But as we previously reported, that $US4.5 billion number isn’t straightforward and is influenced by how Microsoft bundles its products together when companies renew their software contracts.

The pure cloud company just hit over $US4 billion in revenues in its most recent fiscal year and expects to hit $US5.3 billion at the end of its current fiscal year. To get there, it took 15 years and a major acquisition, the marketing automation company ExactTarget.

Amazon, the online retailer and cloud market leader, is about to pass $US4 billion in revenue in 2014, too. (It doesn’t report cloud revenue but does lump it into its “other” category, which hit $US3.9 billion in fiscal 2014’s first nine months.)

To be sure, $US1 billion, or even $US3 billion a year, is peanuts compared with the $US6.8 billion Oracle earned from its software business just last quarter. But cloud contracts are tallied differently. Companies pay less for them up front and more for them over time, and so cloud vendors can report the revenue only as it is earned. That $US3 billion worth of bookings is really worth a lot more money over time.

And most importantly, Oracle promises it is going to hit that $US3 billion number while still growing its traditional software business — without cannibalising it.

In other words, it says that each quarter it is gaining hundreds of new customers, not just ones who are moving from regular software installed in their data centres (known as on-premises) to the cloud.

Ellison says cloud customers are coming from those who would have chosen competitors Workday and Salesforce. And, he says, these companies are buying multiple cloud products from Oracle because Oracle has become a one-stop shop for everything, from hardware through every possible cloud product they might want.

“Look at our product portfolio,” Ellison said on the call. “Who wins in all of these battles? The suite vendors always beat the point solution guys. It’s happened in every generation of computing where the end user, the customer, doesn’t want to be the integrator of 30 separate applications from 30 separate vendors. No different now, just on the cloud now.”

All told, co-CEO Mark Hurd says the company added 860 new software-as-a-service customers last quarter, with more than 230 of them ordering more than one cloud service. For its human-resources cloud that competes with Workday, Oracle signed on 230 new customers and nearly 150 new customers for its financial software cloud customers, he said.

Better still, co-CEO Safra Catz promises that the company is doing this while preserving fat 46% operating margins.

“I am very pleased with where margins are laid out this quarter, and as we get to volume, I actually think we are going to do better — continue to do better,” she said.

And that’s a hugely sunny outlook for Oracle, which has wavered for the past few years as it revamped: overhauling its legendary sales force, learning how to become a hardware company, and building and acquiring its way into the cloud business, all while keeping its bread-and-butter database business alive.

Here’s Oracle’s all-time stock chart:

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