Just this month two major software houses released their quarterly earnings one day after another – Oracle and Adobe. Oracle shrank some 5% in total revenues and just managed to hit its EPS expectations while Adobe hit its numbers in revenue and subscribers and earnings. The two companies provide a study in contrast about how traditional software companies deal with the impact of the cloud. When do you make the move and how do you do it?
Oracle was originally a denier of the impact of the cloud. The high profile CEO, Larry Ellison, even went on a well-publicized rant over the “nonsense” of cloud computing. Over the years though, that changed as cloud’s competitive bite was increasingly felt. In 2013, after missing revenue expectations three quarters in a row, Oracle was embracing the cloud. In fact, by 2014, the pundits were having a lot of fun – at Ellison’s expense – by comparing his earlier remarks with his newfound enthusiasm.
But was it too little and too late? According to Oracle’s own numbers for the quarter just announced, cloud is now growing like gangbusters at 29% and 25% for SaaS/PaaS and IaaS, respectively. It is a respectable billion dollar a year business. But here is the rub, it only add up to 5% of total revenues while the rest of the business is flat or declining at rates up to 17%.
Throughout this same time the cloud was roiling all aspects of the software industry. A little earlier in 2011 and a little further south in Silicon Valley another company, Adobe, had come to a different conclusion. Shantanu Narayen, Adobe’s CEO, gathered analysts and investors together to announce the biggest transformation in the company’s 30-year history. It would go from selling its core software with high license and upgrade fees to providing it only in the cloud at low monthly service rates of $20 to $50 per month.
This was decidedly a risky move since revenues were absolutely going to be depressed for a time. In the first three weeks after the announcement the stock plunged 15% as investors left the stock and 2012 was a tough year. But, by 2013 things were looking up, investors had learned to look at ARR (Annual Recurring Revenues) and quarterly additions to a subscriber base rather than at the traditional way of they viewed software companies.
Now, here we are in 2015. Ellison is claiming that cloud will grow incredibly fast and the future is bright. Adobe tells us that 73% of its revenue now comes from recurring subscriptions and that it plans to hit 6 Million subscribers up from 5.3 million currently. How are things going overall for the two companies? Actually, since 2011 Oracle’s stock is up 37%. However, the NASDAQ is up 104% in the same period – and Adobe? Well, it is up over 200%.