Oracle (NASDAQ:ORCL) is the world’s second largest software company in the multi-billion dollar software development market with revenues in excess of $37 billion and a market capitalization of $187 billion. The company competes with other large cap software development companies such as SAP (NYSE:SAP), IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT). Competition within the rapidly expanding Software-as-a-Service market has been intense, and players across the board have increased their investments to grow fastest and capture maximum share.
In the recently concluded Q3FY14, Oracle reported a 24% increase to $292 million in quarterly revenues from its cloud business. (Oracle’s fiscal years end with May.) However, the company has lagged behind rival SAP AG in terms of cloud revenue growth. In the latter’s recently concluded Q1FY14, SAP reported a 38% increase in cloud revenues to $316 million. Recently, Oracle announced the ‘Customer 2 Cloud’ program as an effort to boost growth rate in its cloud business.  Through the program, the company expects to accelerate customer migration from on-premise applications such as Oracle’s Human Capital Management (HCM) and Customer Relationship Management (CRM, respectively acquired with PeopleSoft and Siebel) onto Oracle Cloud applications.
In this quick take, we take a look at the company’s Customer 2 Cloud program and its impact on overall cloud revenue growth rate for Oracle. We have a $45 Trefis price estimate for Oracle which stands at an 8% premium to its current market price of $42.
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‘Customer 2 Cloud’ Program Could Boost Oracle’s Cloud Revenues
Currently, the Customer 2 Cloud program is open to all existing Oracle HCM and CRM customers on Siebel, PeopleSoft, JD Edwards and Oracle E-business suite platforms. Customers having on-premise applications installed on these platforms can be redirected to suitable Oracle Cloud offerings within the same product vertical. As an example, Oracle PeopleSoft clients with on-premise installations of the HCM offering are given an opportunity to free up their support spend for these on-premise deployments and invest those dollars on a modern offering, such as an Oracle Human Capital Management (HCM) cloud subscription.
Through this program, Oracle gains additional customers from its on-premise offerings onto an SaaS model, which should boost revenue over a long term. On the other hand, enterprise customers get to reduce their total cost of ownership (TCO) by migrating from the on-premise deployment model onto a SaaS model. The program also offers various tools to make businesses cloud ready at a rapid pace, depending on customer needs. We believe the intention of this program is to further accelerate migration from on-premise deployments onto Oracle cloud. Successful adoption of the program should be able to boost Oracle’s cloud revenues going forward.
Moreover, margins are expected to increase through the growth in the cloud business. Oracle’s gross margins currently stand at 81.6% for CY13 (ended December 2013) compared to Salesforce’s gross margins of 85% for FY14 (ended January 2014). The higher margin from Salesforce indicates potential upside available from gaining a significant chunk of revenues from cloud deployments. The margin expansion from cloud primarily occurs due to lower software publishing and hardware depreciation charges, partially offset by the higher data center related costs. However, at the current phase of Oracle Cloud, gross margin expansion is difficult as it only contributes to a small portion of the company’s $38 billion revenues.Notes: