Here’s Why Oracle Is Pulling Out All the Stops to Boost Its Cloud Profits

The specifics of reported job cuts at Oracle reveal much about the software giant's priorities.
By Eric Jhonsa ,

Editors' pick: Originally published July 8.

It's no secret that Oracle (ORCL) - Get Report has been making an all-out push to grow its cloud-related sales to offset ongoing declines in its on-premise software and IT hardware businesses. Thus, it's not too surprising to hear the company is laying off staff tied to the latter area as it directs more resources towards the former.

However, the specifics of a new job cut report suggests Oracle is also pulling out all the stops to boost the profitability of a cloud software business whose margins remain well below those of the businesses it's replacing. 

Trade site CRN reports Oracle recently laid off 225 to 300 members of its North American sales team, including many sales engineers and consultants who worked with resale channel partners to implement new software projects. Several sales and channel execs were also let go, including a VP of alliances and channels for its North American sales group.

On Friday afternoon, shares of Oracle were trading up 0.7% to $40.79.

Notably, the channel-related job cuts are said to be part of co-CEO Mark Hurd's efforts to "drive more cloud licensing sales through his direct sales force," with channel partners relegated to providing systems integration work. Moreover, Hurd is reportedly moving to reshape Oracle's sales force by adding "younger, less expensive staff."

These efforts follow the launch of a self-serve interface that lets companies sign up for cloud subscriptions without dealing with sales reps. They also come with Oracle having set an ambitious -- and possibly unrealistic -- goal of being the first company to reach $10 billion in annual revenue from cloud app (SaaS) and cloud app platform (PaaS) sales.

Oracle had $2.2 billion worth of SaaS/PaaS revenue during the fiscal year ending in May. That figure represents 49% annual growth, but is far below the $6.7 billion in revenue cloud CRM software and PaaS giant Salesforce.com (CRM) - Get Report obtained in the fiscal year ending in January.

This aggressive cloud sales push hasn't been without controversy. Oracle has been accused of using heavy-handed sales tactics to get on-premise software clients to subscribe to cloud apps. It also recently became the target of a whistleblower suit from a fired senior finance manager who alleges she was pressured to make Oracle's cloud numbers look better than they actually were.

Regardless, a look at Oracle's May quarter numbers help show why the company is bent on growing cloud sales and profits. SaaS/PaaS revenue rose 66% annually to $690 million, but traditional software license revenue fell 12% to $2.77 billion. Software license update and product support revenue, which is driven by past license sales, rose a modest 3% to $4.81 billion, but keeping that growth positive over the long run will be tough as license revenue keeps declining.

Moreover, Oracle's SaaS/PaaS gross margin exiting the May quarter was 56% -- up from 51% in the February quarter, but still well below typical gross margins for on-premise enterprise software businesses. The company promises SaaS/PaaS margins will be much higher in a year, and maintains a long-term margin target of 80%.

However, the fact that Oracle, rather than its clients, is responsible for building and managing the data center infrastructure on which its cloud apps are run, and (like rivals) is baking support services into cloud subscriptions, will make it tough for SaaS/PaaS margins to match on-premise margins.

As a result, Oracle has to get creative in its efforts to boost cloud profits. Moving sales normally handled by channel partners to Oracle's internal sales force, and moving ones normally handled by the sales force to an online interface, are certainly two ways to do it.

Loading ...