Cloud Gross Margins: Comparing Oracle vs. Microsoft
Oracle’s cloud computing margins are rising rapidly, and gross margins for SaaS and PaaS will march toward 80% over time, according to CFO Safra Catz. That’s particularly impressive, considering Microsoft’s cloud margins have been under pressure.
Catz, peer CEO Mark Hurd and Chairman Larry Ellison provided multiple cloud revenue momentum updates during Oracle’s Q3 earnings call this evening with Wall Street analysts. It was an all-out blitz as Oracle attempted to address the elephant in the room: A former employee who claims Oracle has artificially inflated its cloud revenues. Oracle denied the claims when they surfaced earlier this month, and then followed up with key milestones during today’s earnings call.
Among the highlights:
- Total cloud revenues — SaaS, PaaS and IaaS — were $737 million for the quarter, up 43% from the corresponding quarter last year.
- The Q3 gross margin for SaaS and PaaS was 51%, up from 43% last quarter.
- “And we will see further improvement in Q4. From there we will be targeting 80% over time,” Catz told attendees.
Catz even pulled back the curtain a bit on 2017 expectations. For Q1 2017 she predicted:
- SaaS and PaaS revenue growth should be higher than the 59% mid point of my Q4 guidance.
- SaaS and PaaS gross margin are expected to be higher than Q4 gross margins.
Larry Ellison Attacks Salesforce.com, Workday
Ellison also joined the call, taking some time to attack rival Salesforce.com in the cloud market. He claimed:
“Oracle is now selling more new SaaS and PaaS annually recurring cloud revenue than any other company in the world including Salesforce.com. We are growing much faster than Salesforce.com more than twice as fast. Because we sell into a lot more SaaS and PaaS market than they do. We compete directly with Salesforce.com in every segment of the SaaS customer experience market including sales, service and market.”
Ellison and Hurd expanded the conversation to include cloud-based HR and other emerging markets — with Hurd claiming Oracle is taking share from WorkDay. Hurd’s comments involved specific customer wins — which prompted a nudge from Catz to “stop” revealing the detailed customer wins. The Oracle leadership team mentioned Workday 24 times during the call, Salesforce 8 times, and Microsoft four times.
Admittedly, Oracle’s growth rate claims vs Salesforce and WorkDay are potentially misleading. Oracle has a smaller cloud business than that of Salesforce.com, so head-to-head percentage growth rate figures can be a bit misleading.
The Bigger Win: Cloud Margins
The bigger story here likely involves Oracle’s cloud gross margins, and the company’s ability to differentiate from Amazon Web Services and Microsoft’s cloud services — particularly Azure.
Yes, Oracle competes against AWS and Azure in the IaaS (Infrastructure as a Service) market. But that isn’t Oracle’s strong suit. And the IaaS segment is prone to price wars and discounting.
Microsoft’s commercial cloud gross margins were 45 percent in the company’s most recent quarter, according to CFO Amy Hood. During an earnings call in April, Microsoft essentially conceded that margins could fall even more as the company continues to build out its cloud infrastructure.
Oracle’s message is exactly the opposite, claiming gross margins in the cloud market will approach 80 percent in the quarters ahead.
Where do partners fit in? Oracle activated a range of cloud partner program updates in February. We’re checking in with the company for more updates.