Setting aside its rivalries, Oracle (NASDAQ:ORCL) has announced two separate partnerships with Microsoft and Salesforce to boost its cloud-computing efforts as well as hardware business. Oracle, in its earnings conference call, had indicated that it will be announcing technology partnerships with some of the largest and most important Software as a Service (SaaS) companies and infrastructure companies in the cloud space. As per its deal with Microsoft, the latter’s Windows Azure cloud-computing service and Hyper-V virtualization software will support Oracle’s Java, Database, Linux and WebLogic Server. Under a separate deal with cloud CRM market leader Salesforce, Oracle will supply its hardware including Exadata server computers and Java middleware to power Salesforce’s cloud applications. 
The move to tie-up with its longtime rivals comes as Oracle struggles to revive growth in its key businesses amid threats from growing use of cloud services. In the last quarter, traditionally one of the strongest quarters for Oracle, total new software sales and cloud subscription revenues grew by only 1%, missing the market expectations (Read Oracle Doubles Dividend, Steps Up Buyback As Software Sales Disappoint). While the deals may not prove to be a game changer in the near term, it will certainly strengthen Oracle’s position in the cloud market and help it fend-off competition from cloud rivals. Below we take a look at how these deals can help Oracle.
We are in the process of updating our $40 Trefis price estimate for Oracle, which currently stands nearly 30% above its current market price.
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Deal With Microsoft A Win-Win For Both Companies
The adoption of cloud-based services by businesses is growing at a rapid pace as the SaaS model costs less than on-premise software. Oracle, which is the market leader in the on-premise database market, has seen its growth slowing down due to the same reason even as it has tried to make inroads into the cloud market. In Q4, Oracle registered a 1% increase in revenue from new software licenses as well as cloud subscriptions, which came in at the lower end of its expectations of 1%-11% growth.  By striking a deal with Microsoft, Oracle has reiterated its focus on cloud services.
Pursuant to the partnership, Oracle will support versions of its well known database and Java software on Microsoft’s infrastructure as a service Azure cloud platform. Oracle also will let customers use their current software licenses on the Azure platform. The collaboration will help Oracle retain its customers, who have been mulling a move to cheaper cloud platforms. Further, the deal will also help both tech giants attract customers who are seeking more technical compatibility between their products, which are known for their separate capabilities. Many of Oracle’s customers run Oracle software on the Windows Server. Aside from rapid low-cost implementations, many businesses also expect application integration, even from different vendors, to remain seamless.
Deal With Salesforce To Help Its Hardware Business
Salesforce already uses Oracle’s database software to run its cloud service and as part of the collaboration, it will begin using Oracle’s Java middleware as well. Further, Salesforce will also use Oracle’s financial management and HR software internally. However, we believe the most important part of the deal is use of Oracle’s Exadata server computers. Oracle’s hardware product business continued to decline at double digit rates as the sales of server-systems kept on shrinking. Its engineered systems division, however, is showing robust growth with all of its Exa products gaining traction. The Exa line of products are helping Oracle ride the Big Data trend while enabling it to improve its hardware margins.
Salesforce is one of fastest growing cloud software firms in the world and therefore, would require continued need of servers as it expands its services going forward. This would, in turn, drive demand for Exadata servers. This should offset some pressure in Oracle’s hardware business, which is expected to come back on growth track by early next year.Notes:
- Oracle Mends Fences With Microsoft, Salesforce in Cloud Push, Bloomberg, June 26 2013 [↩]
- Oracle’s CEO Discusses F3Q13 Results – Earnings Call Transcript, Seeking Alpha, March 20 2013 [↩]