Oracle Faces Class Action Lawsuit Over Cloud Business Claims

DOES ANYONE ACTUALLY WANT TO BUY ORACLE CLOUD?

Oracle has a long history of providing valuable on-premises and cloud solutions to customers. It also has a reputation for aggressive audit tactics that include horse trading audit penalties for additional purchases of Oracle products. This suit alleges that cloud purchases were made as a result of threats and extortive tactics, which brings the value of Oracle cloud solutions into question. Many organizations have purchased Oracle cloud solutions; but did they do so because they saw value in that solution or because they wanted to avoid an audit finding. Considering that many organizations have since dropped Oracle cloud, is this because they never used it in the first place or because they chose to move to another solution?

THE STORY BEHIND ORACLE’S CLOUD GROWTH

In the early 2010s, cloud businesses led by companies like Amazon and Microsoft offering PaaS, SaaS and IaaS were making headlines with their tremendous growth and profitability. Sensing opportunity, Oracle drove a concerted effort to establish themselves as a player in the cloud market. Through organic growth and acquisition, Oracle’s cloud business now represents a significant contribution to their revenue and margin.

I’ve analyzed Oracle’s quarterly filings from fiscal Q1 2012 for overall revenues, and cloud revenue contribution from fiscal Q4 2013 (when Oracle first broke out reporting for cloud) to the most recent filing, fiscal Q4 2018 (which incidentally was when Oracle stopped detailing cloud revenue in their report).

A Growing Share of Revenue.

We can see a few distinct trends in Figure 1. Oracle’s cloud business has grown continually and represents an increase in revenue and a substantial increase in what that revenue represents as a percentage of total revenues. Cloud revenue grew from $370 M in Q4 2013 to $1.7 B in Q4 2018. Cloud revenue as a percentage of total revenue grew from 3% in Q4, 2014, peaked at 16% from Q1 to Q3 FY 2018, and sits at 15% in Q4, 2018.

This chart also includes our first look at how Oracle has reported their cloud business growth, represented here with the yellow line. While cloud revenue (blue bars) and % cloud vs total revenue (green line) have risen relatively consistently, the % cloud growth YoY (yellow line) has undergone larger variation. This will be significant when we look at the stock price performance. It has also taken a significant downward trend recently, regressing to 25% YoY in Q4 2018. To put it another way, this 3rd lowest historical growth figure is only three percentage points above the lowest one reported back in Q4 2014.
 

Cloud Revenue Growth Doesn’t Equal Total Revenue Growth.

Figure 2 shows us Oracle’s total revenue (orange bars) yearly cycle with Q4 strength, a significant drop in Q1, then growing again through Q2 and Q3. This also shows Oracle’s cloud revenue contribution where the % cloud vs total revenue (green line) aligns very closely with the cloud revenue (blue bars). This is to be expected.

What isn’t necessarily expected is that the linear path for total revenue (dashed orange line) has a very slight upward trajectory while the cloud revenue has become a more significant portion of the total revenue. This tells us that the cloud revenue gains are not necessarily organic growth and do not necessarily provide a net gain. Again, cloud revenue closed exited fiscal Q4 2018 at 15% of the total Oracle revenue. Digging further into the numbers, from fiscal years 2014-2018, cloud revenue contributed:

  1. In fiscal Q1-Q4 2014, $1.57 billion compared to total revenues of $38.27 billion (4%)
  2. In fiscal Q1-Q4 2018, $6.25 billion compared to total revenues of $39.83 billion (16%)


Put another way, during this same time period, Oracle’s cloud revenues grew $4.67 billion representing a compound annual growth rate (CAGR) of 58.2% while the overall revenue only grew $1.55 billion representing a CAGR of 1.3%.

 

 

Cloud Growth Measured More Accurately.

As the % cloud vs total revenue (green line) in Figure 2 suggests, Oracle’s cloud revenue growth is perhaps more accurately viewed through a QoQ lens, since these subscriptions are cumulative and recurring. In Figure 3 we see that while there has been some fluctuation in the % cloud growth QoQ (dark blue line), the linear (dark blue dash) line increases slightly, as does the total revenue (orange dash) line in Figure 2. We also see how the last four peaks in the QoQ growth match to each fiscal Q4, for years 2015 through 2018. This shows us that the same cycle for Oracle’s total revenue and Oracle’s cloud growth QoQ have peaked in each Q4.
 

 

Cloud Growth Sparks Total Revenue Growth.

It’s difficult to spot how Oracle’s cloud revenue and cloud growth has impacted Oracle’s total revenue, outside of currently being over-represented as a percentage of the total revenue. What is particularly interesting when looking at Figure 4 is the correlation between Oracle’s % cloud growth YoY (yellow line) taking off after fiscal Q2 2016 and the turning point for Oracle’s % total revenue growth YoY (red line).

Oracle’s % total revenue growth YoY hit a low of -6% in Q2 2016, this coincided with the 3rd slowest % cloud growth YoY of 26%. Once the cloud growth took off, by Q1 2017 Oracle’s % total revenue growth YoY hit positive at 2%, as the % cloud growth YoY hit a historical high of 62%.

A snapshot of what this shows is that what had been six out of seven quarters of flat to negative growth up to fiscal Q2 2016, was followed by seven out of eight quarters of positive % total revenue growth YoY.
 

We can see correlations between Oracle’s cloud business and its effect on Oracle’s total business. It would seem that as the cloud business goes, so does Oracle in general. At the crux of the lawsuit is whether the cloud business was artificially propped up or had accelerated growth due to improper sales tactics, and subsequently, what affect did that have on the stock price.

 

THE THREE PHASES OF ORACLE’S CLOUD BUSINESS

We’ve seen some of the trends for Oracle’s cloud business and how they affect and align to the total revenue growth for the company. When we look at the timeframes, there are three phases that become evident and show correlation between the stock price and the % cloud growth YoY (as was highlighted in the quarterly reports). Figure 5 shows these three phases charted for Oracle’s stock price compared to the % cloud growth YoY.

To be clear, I am not a financial analyst and any correlations noted between the stock price and the % cloud growth YoY are simply trends that show up on the chart. There are numerous factors that affect stock prices, from changes in guidance, operating income performance, buybacks, socioeconomic variables and more.

Phase 1: Fiscal Q4 2013 to Q2 2016 – solid but unspectacular organic growth aligns to stock fluctuations.

  1. What is interesting is the spike in the % cloud growth YoY of 45% in Q2 2015. It mirrors the stock spike at the same time to $44.97. Both lines then drop up heading up to the end of this phase at Q2 2016.
  2. This phase averaged 6% for Oracle’s % cloud growth QoQ.
  3. The stock price follows quite a similar path to the % cloud growth YoY.

 

Phase 2: Fiscal Q3 2016 to Q3 2017 – cloud and overall revenue boosted by acquisition and roughly aligns to a stock increase.

  1. Oracle’s cloud business takes off, with YoY growth spiking to over 60% for a few quarters. This was additionally supported by the NetSuite acquisition that closed in Nov. 2016 (fiscal Q2 2017).
  2. Most markedly, the cloud contribution to overall revenue more than doubles in this timeframe from 7% to 16%. Cloud now represents a substantial contribution to Oracle’s total revenue.
  3. This phase averaged 13% for Oracle’s % cloud growth QoQ.
  4. The stock price follows a rough path of reaching the all-time high of $52.90 on March 9, 2018, but with a distinct delay from the % cloud growth YoY which had been peaking about six months prior.

 

Phase 3: Fiscal Q4 2017 to present – slowing cloud growth aligns with stock price decline.

  1. The first month of fiscal Q4 2017, which was March 2017, marks the start of the timeframe the lawsuits bring into question. Oracle’s fiscal Q4 2017 is marked by 58% YoY cloud growth and 14% QoQ cloud growth (also the last of the double digit QoQ cloud growth).
  2. By the end of this phase, Oracle’s YoY cloud growth plummets significantly, to the most recent fiscal Q4 2018 showing 25% growth.
    1. Showing is used loosely here because Oracle suddenly stopped detailing their cloud revenue and when asked about it in the post earning’s call, co-CEO Safra Catz, responded, “So first of all, there is no hiding. I told you the cloud number, $1.7 billion. You can do the math.”
  3. So I did the math. $1.7 B represents 25% YoY, which was actually ahead of the guidance of 19-23% they gave prior.
  4. Exiting this phase, Oracle’s cloud business growth slowed to an average of 6% QoQ.
  5. The stock price follows a distinct downward trend as the % Cloud Growth YoY.
     

 

WHAT THE LAWSUIT CLAIMS

From one statement released about the lawsuit, “… on March 19, 2018, when the Company disclosed that cloud revenue growth had stagnated and forecasted significantly slower sales growth for its cloud business than its competitors. Following these disclosures, analysts and market commentators connected Oracle's poor financial performance to its improper sales tactics. As a result of these disclosures, the price of the Company's stock declined significantly.”

Further details of these alleged tactics claim that Oracle representatives were:

  • “(1) threatening existing customers with “audits” of their use of Oracle’s non-cloud software licenses and levying expensive penalties against those customers, unless the customers agreed to shift their business to Oracle cloud programs;
  • (2) decreasing customer support for certain Oracle on-premises or hardware systems, in an effort to drive customers away from such systems and into cloud-based systems; and
  • (3) strong-arming customers by threatening to raise the cost of legacy database licenses dramatically if the customers choose another cloud provider. These tactics alienated and angered Oracle customers, which in some cases have not only refused to purchase Oracle's cloud offerings but have also looked to terminate their existing business relationships. When the true details entered the market, the lawsuit claims that investors suffered damages.”

 

The suit claims that because of these factors, the revenue growth is unsustainable and concealed the lack of real demand for Oracle cloud offerings; negatively affecting Oracle’s stock price.

As Figure 5 charts Oracle’s stock price (the close price from the start of the next month after each fiscal quarter) compared to Oracle’s YoY cloud growth. There is a correlation that I’m sure the lawsuits will detail and analyze further than this simple chart.

CONCLUSION

If, as the suit alleges, Oracle’s cloud growth was driven by predatory and aggressive audit tactics – and subsequent horse trading of audit penalties for cloud purchases, then Oracle’s cloud business would seem to be headed for continued degradation as customers drop Oracle’s cloud solutions or even Oracle as a whole.

The question is whether your organization was one of those customers that was pushed into purchasing Oracle cloud or will face similar pressure from Oracle soon? The best position to be in is to avoid audit threats and penalties by having better visibility into and control of your Oracle licensing in the first place.

 

Talk to Snow to learn how we can help you with you get ahead of audit risks with Oracle.