Oracle’s FY2014 Financial Results Point to New Opportunities for Sourcing Professionals

Sourcing professionals already understand the importance of monitoring financial performance to assess risk in their key suppliers’ ability to deliver commitments. Sometimes sourcing professionals can also find valuable negotiation leverage in the financial results of their key suppliers, as is the case with Oracle’s Q4 2013 numbers . In my opinion, the revealing aspects that you can use to increase your bargaining power over the next couple of quarters, include:

  • The flat software license revenue for the second half of the year. Oracle execs blamed “a lack of urgency” in its salesforce when it missed its targets in Q3, claiming that deals had merely slipped, not disappeared. In the Q3 analyst earnings call, Oracle President and CFO Safra Catz described how Oracle had added “thousands of new sales reps around the world”and now had “work to do in training new reps on managing the sales process and the importance of establishing a quarterly rhythm with their deals.” The absence of a rebound in Q4 (Oracle’s new software licenses and cloud software subscriptions sales for its H2 were almost identical to  same period last year at - $6,358 million, as against $6,359 million in H2 FY12) suggests that Oracle has not completed that work. In the Q4 earnings call Ms. Catz cited “currency headwinds” as the main driver of Oracles’ financial performance while Oracle President Mark Hurd described a healthy pipeline and a salesforce “geared to outperform our competitors."

What it means for sourcing professionals: Any Oracle sales teams that missed their 2013 targets will be particularly keen to achieve good numbers in its Q1. My colleagues have documented the challenges for Oracle’s applications business, including the signs that Oracle Customers Are Hesitant To Embrace Fusion Applications.  In this context anyone considering buying application licenses in the next 6 months will have extra leverage right now – but only if you have a real walk-away alternative, such as to go with another vendor, or to delay the purchase. Those of you on older product versions may find Oracle working a bit harder to keep your revenue stream, rather than see you switch to a 3rd party support provider or migrate to a SaaS alternative. You may be able to get an amazing deal if you’re willing and able to bring forward license purchases you were planning to make later in the year and buy them now.

  • The minimal increase in deferred revenue. This is one of the most important numbers for SaaS vendors, representing the deals they’ve closed this year that they’ll deliver next year and beyond. Traditional companies like Oracle recognize license sales as they book them, so its $7.1 billion of deferred revenue represents the unexpired portion of SaaS and maintenance contracts. This number grew just 1.2% between May 2012 and 2013, suggesting that Oracle’s SaaS business isn't growing very quickly, or its maintenance renewal rate is falling, or a combination of both. Some financial analysts are criticizing Oracle for its “cloud missteps” as Reuters’ Jim Finkle explained here. For example, he quotes JMP Securities analyst Pat Walravens as saying "They spent the last four years focusing on engineered systems when the bigger industry trend was the cloud. They now have a structural problem." He also cites Tim Ghriskey, chief investment officer with Solaris Group saying "it (SaaS) is going to pressure their business for a while”.  

What it means for sourcing professionals: Oracle needs to grow the SaaS businesses it has acquired its way into, such as Rightnow and Taleo, but I don’t believe it can do that unless it embraces a more buyer-friendly approach to commercial negotiations. Anyone negotiating a SaaS contract with Oracle should hold out for vital contract terms, such as a renewal option at a guaranteed price, and should walk away rather than accept unacceptable contracts.

Bottom Line: Oracle is still a very successful, powerful company that will continue to be an important supplier to most enterprises. Oracle’s 4th quarter is usually the time to get the best deals, but two consecutive quarters of missed sales estimates may lead to exceptional pressure on sales teams to deliver better numbers in Q1 FY2014. This could be a good time to negotiate with Oracle.