In a year when enterprise software spend is expected to grow about 8% and many publicly-traded U.S. software firms have been reporting strong double-digit growth, Oracle (ORCL) reported that its revenue fell 1% annually during its February quarter, and has guided for revenue to be flat to down 2% during its May quarter.
And at a time when many rivals continue aggressively growing their sales and R&D headcounts, Oracle has seen a slew of stories emerge detailing major layoffs.
In March, Oracle carried out layoffs impacting its operations in Silicon Valley, India and elsewhere, with some sources stating the total number of jobs cut was in four figures. Then, in early May, reports emerged that Oracle is laying off more than 900 Chinese workers and planning to shutter its local R&D operations, which employ 1,600 people.
And most recently, Business Insider reported that Oracle has laid off 300 Seattle workers -- including some workers responsible for building the company's second-generation (Gen2) cloud infrastructure, which it unveiled to much fanfare last October. Notably, the site adds that three Oracle employees it talked to said the Gen2 team was hit because "it is filled with highly-paid engineers and is, so far, generating very little revenue to cover their costs."
The BI report also suggests there's a high level of dysfunction within Oracle's cloud infrastructure operations. Among other things, it reported of infighting and turf wars between the Seattle cloud team and a Silicon Valley team responsible for Oracle's original cloud infrastructure, and of lengthy procurement times for basic hardware orders.
Worth keeping in mind while digesting these reports: Oracle's cloud infrastructure share remains a small fraction of that of market leader Amazon Web Services (AWS), and is also much smaller than that of Microsoft Azure and the Google Cloud Platform (GCP). Though Larry Ellison has taken plenty of shots at AWS and his company has made it more expensive to run Oracle databases on third-party clouds than its own, the fact remains that Oracle -- owing to disadvantages in scale, features and third-party software and services support -- remains a bit player in this fight relative to the Big Three, each of which offer plenty of non-Oracle database services.
Meanwhile, though Oracle still makes sure to talk up the strong growth rates seen by various cloud app businesses during each earnings call, the company's total revenue growth figures make it clear that its cloud growth is being offset by declines in traditional, on-premise, revenue streams. Of course, it's now impossible to know just how much Oracle's total cloud operations are growing, since it stopped breaking out its cloud revenue last year.
In spite of its top-line pressures, Oracle is still seeing healthy EPS growth for now thanks to spending cuts -- non-GAAP operating expenses were down 3% annually in the February quarter -- and giant stock buybacks (they totaled nearly $30 billion over the last three quarters). Thus, while Oracle is expected on average by analysts to see its revenue drop 1% in fiscal 2019 (it ends in May) and grow a modest 2% in fiscal 2020, its EPS is expected to grow about 10% in both fiscal years.
Though Oracle's story isn't exactly like IBM's (IBM) -- among other things, its free cash flow hasn't fallen sharply the way that Big Blue's has from a 2012 peak of $18.2 billion -- it's hard not to see some parallels. Like IBM, Oracle has been gradually losing share in its total addressable market, but has tried to keep Wall Street from focusing on this fact by talking up the strong growth seen by certain businesses and downplaying the declines seen elsewhere. And like IBM, Oracle has leaned heavily on job cuts and buybacks to prop up its EPS in the fact of little to no revenue growth.
One other thing Oracle has had in common with IBM, which last October struck a $34 billion deal to buy Red Hat (RHT) : Oracle hasn't been shy about using M&A to boost its top line. However, this has been a little less true during the last couple of years, as soaring multiples for cloud software firms (that is, the ones actually seeing strong revenue growth) have apparently made Oracle more cautious about pulling the trigger on large deals. Since striking a $9.3 billion deal to buy mid-market cloud software firm NetSuite in mid-2016, Oracle's biggest purchase has been a $1.2 billion deal to buy cloud construction software firm Aconex that was inked in Dec. 2017.
Nonetheless, given the scope of the revenue growth pressures that Oracle is seeing, it's fair to wonder if the company will talk itself into making another costly acquisition of a cloud/SaaS software firm, or perhaps use M&A to grow its presence in a field such as hardware or security. In the absence of meaningfully improved organic growth, Larry Ellison & Co. might decide such a move is its least bad option.