 From theCUBE Studios in Palo Alto in Boston, bringing you data-driven insights from theCUBE and ETR. This is Breaking Analysis with Dave Vellante. On Friday, December 10th, Oracle announced a strong earnings beat and raise on the strength of its licensed business and slightly better than expected cloud performance. The stock was up sharply on the day and closed up nearly 16% after passing 280 billion in market value. Oracle's success is due largely to its execution of a highly differentiated strategy that has really evolved over the past decade or more. Deeply integrating its hardware and software, heavily investing in next generation cloud, creating a homogeneous experience across its application portfolio and becoming the number one platform, number one for the world's most mission critical applications. Now, while investors piled into the stock, skeptics will point to the beat being weighed toward licensed revenue and likely keep one finger on the sell button until their convinced Oracle's cloud momentum is more consistent and predictable. Hello and welcome to this week's Wikibon Cube Insights powered by ETR. In this Breaking Analysis, we'll review Oracle's most recent quarter and pull in some ETR survey data to frame the company's cloud business, the momentum of Fusion ERP where the company is winning and some gaps and opportunities that we see. The numbers this quarter were strong, particularly top line growth. Here are a few highlights. Oracle's revenues that grew 6% year on year, that's in constant currency, surpassed $10 billion for the quarter. Oracle's non-gap operating margins were an impressive 47%. Sapphire Cats has always said cloud is a more profitable business that's really starting to show in the income statement. Operating cash and free cash flow were 10.3 billion and 7.1 billion respectively for the past four quarters and would have been higher if not for charges largely related to litigation expenses tied to the hiring of Mark Herd, which the company said would not repeat in the future quarters. And you can see in this chart how Oracle breaks down its business, which is kind of a mishmash of items they lump into so-called cloud, the largest piece of the revenue pie is cloud services and licensed support, which in reading 10Ks, you'll find statements like the following. Licensed support revenues are our largest revenue stream and include product upgrades and maintenance releases and patches as well as technical support assistance. And statements like the following, cloud and licensed revenue include the sale of cloud services, cloud licenses and on-premises licenses, which typically represent perpetual software licenses purchased by customers for use in both cloud and on-premises IT environments. And cloud license and on-prem license revenues primarily represent amounts earned from granting customers perpetual licenses to use our database, middleware, application and industry specific products, which our customers use for cloud-based, on-premise and other IT environments. So you tell me, is that cloud? I don't know. In the early days of Oracle Cloud, the company used to break out IaaS, PaaS and SaaS revenue separately, but it changed its mind, which really makes it difficult to determine what's happening in true cloud. Look, I have no problem, including same-same hardware, software control plane, et cetera, you know, the hybrid, if it's on-prem in a true hybrid environment, like Exadata Cloud, a customer or AWS Outpost. But you have to question what's really cloud in these numbers. And Larry in the earnings call mentioned that Salesforce licenses the Oracle database to run its cloud and Oracle doesn't count that in its cloud number, rather it counts it in license revenue. But as you can see, it buries that into a line item that starts with the word cloud. So I guess I would say that Oracle's reporting is maybe somewhat better than IBM's cloud reporting, which is the worst, but I can't really say what is and isn't cloud in these numbers. Nonetheless, Oracle is getting it done for investors. Here's a chart comparing the five-year performance of Oracle to some of its legacy peers. We excluded Microsoft because it skews the numbers. I mean, Microsoft would really crush all these names, including Oracle. But look at Oracle. It's wedged in between the performance of the NASDAQ and the S&P 500. It's up over 160% in that five-year timeframe, well ahead of SAP, which is up 59% in that time, and way ahead of the dismal negative 22% performance of IBM. Well, it's a shame. I mean, the tech tide is rising, it's lifting all boats, but IBM has unfortunately not been able to capitalize. That's a story for another day. Okay, as a market watcher, you can't help but love Larry Ellison. I only met him once at an IDC conference in Paris where I got to interview Scott McNeely, son's CEO at the time. Ellison is great for analysts because he's not afraid to talk about the competition. He'll brag, he'll insult, he'll explain, and he'll pitch his stories. Now in the earnings call last night, he went off educating the analyst community on the upside in the Fusion ERP business, making the case that because only 1,000 of the 7,500 legacy on-prem ERP customers from Oracle, JD Edwards, and PeopleSoft have moved to Oracle's Fusion Cloud ERP, and he predicted that Oracle's cloud ERP business will surpass 20 billion in five years. In fact, he says it's going to be even bigger than that. He slammed the hybrid cloud washing. You can see one of the quotes here in this chart that's going on when companies have customers running in the cloud and they claim whatever they have on-prem is hybrid. He called that ridiculous, I would agree. And then he took an opportunity to slam the hyperscale cloud vendors, citing a telco customer that said Oracle's cloud never goes down. And of course, he chose the same week that AWS had a major outage. And so to these points, I would say that Oracle really was the first tech company to announce a true hybrid cloud strategy where you have an entirely identical experience on-prem and in the cloud. This was announced with cloud at customer two years before AWS announced outposts. Now, it probably took Oracle two years to get it working as advertised, but they were first. And to the second point, this is where Oracle differentiates itself. Oracle is number one for mission critical applications. No other vendor really can come close to Oracle in this regard. And I would say that Oracle's recent quarterly performance to a large extent is due to this differentiated approach. Over the past 10 years, we've talked to hundreds, literally hundreds and hundreds of Oracle customers. And while they may not always like the tactics and licensing policies of Oracle in their contracting, they will tell you the business case for investing and staying with Oracle is very strong. And yes, a big part of that is lock-in, but R&D investments, innovation and a keen sense of market direction are just as important to these customers. When your chairman and founder is a technologist and also the CTO and has the cash on hand to invest, the results are a highly competitive story. Now that's not to say Oracle is not without its challenges or that's not to say Oracle is without its challenges. Those who follow this program know that when it comes to ETR survey data, the story is not always pretty for Oracle. So let's take a look. This chart shows the breakdown of ETR's net score methodology. Net score measures spending momentum and works. ETR each quarter asks customers, are you adding the platform new, that's the line green, increasing spend by 6% or more, that's the first green. Is your spending at E plus or minus 5%, that's the gray. You're spending lining by 6%, that's the pinkish or are you leaving the platform that's the bright red, retiring. You subtract the reds from the greens and that yields a net score which in Oracle's overall case is an uninspiring negative 4%. Okay, so this is one of the anomalies in the ETR data set. The net score doesn't track absolute actual levels of spending the dollars. Remember, as the leader in mission critical workloads, Oracle commands a premium price. And so what happens here is the gray is still spending a large amount of money enough to offset the declines and the greens are spending more than they would on other platforms because Oracle could command higher prices. And so that's how Oracle is able to grow its overall revenue by 6%, for example, whereas the ETR methodology doesn't capture that trend. So you have to dig into the data a bit deeper. So we're not going to go too deep today but let's take a look at how some of Oracle's businesses are performing relative to its competitors. This is a popular view that we like to share. It shows net score or spending momentum on the vertical axis and market share. Market share is a measure of pervasiveness in the survey. Think of it as mentioned share, that's on the X axis. And we've broken down and circled Oracle overall, Oracle on-prem, which is declining in the vertical axis, Oracle Fusion and NetSuite, which are much higher than Oracle overall. And in the case of Fusion, much closer to that 40% magic red horizontal line, remember anything above that line we consider to be elevated. Now we've added SAP overall, which has momentum comparable to Fusion in the survey using this methodology and IBM, which is in between Fusion and Oracle overall on the Y axis. Oracle, as you can see on the horizontal axis, has a larger presence than any of these firms that are below the 40% line. Now above that 40% line, you see companies with a smaller presence in the survey like Workday, Salesforce.com, pretty big presence though, Google Cloud also, and Snowflake, smaller presence, but much, much higher net score than anybody else on this chart. And AWS and Microsoft overall with both a strong presence and impressive momentum, especially for their respective sizes. Okay, now that view that we just shared you or showed you, showed with you, showed you excluded on purpose Oracle specific cloud offering. So let's now take a look at that relative to other cloud providers. This chart shows the same XY view, but it cuts the data by cloud only. And you can see Oracle, while still well below the 40% line has a net score of plus 15, compared to a minus four overall that we showed you earlier. So here we see two key points. One, despite the convoluted reporting that we talked about earlier, the ETR data supports that Oracle's cloud business has significantly more momentum than Oracle's overall average momentum. And two, while Oracle is smaller and doesn't have the growth of the hyperscale giants, its cloud is performing noticeably better than IBM's within the ETR survey data. Now a key point Ellison emphasized on the earnings call was the importance of ERP and the work that Oracle has done in the space. It lives by this notion of a cloud-first mentality, it builds stuff for the cloud and then would bring it on-prem. And it's been attracting new customers according to the company. He said Oracle has 8,500 Fusion ERP customers and 28,000 NetSuite customers in the cloud. And unlike Microsoft, it hasn't migrated its on-prem install base to the cloud yet, meaning these are largely new customers. Now this chart isolates Fusion and NetSuite within a sector ETR called GPP, the very giant public and private companies. And this is a bellwether of spending in the ETR data set. They've gone back and it correlates to performance. So think large public companies, the biggest ones, and also privates, big privates like Mars or Cargo or Fidelity. The chart shows the net score breakdown over time for Fusion and NetSuite going back to 2019. And you can see a big uptick as shown in the blue line from the October 2020 survey. So Oracle has done a good job building and now marketing its cloud ERP to these important customers. Now the last thing we want to show you is Oracle's performance within industry sectors. On the earnings call, Oracle said that it had a very strong momentum for Fusion in financial services and healthcare. And this chart shows the net score for Fusion across each industry sector that ETR tracks for three survey points, October 2020, that's the gray bars, July 21, that's the blue bars and October 2021, the yellow bars. So look, it confirms Oracle's assertions across the board that they're seeing Fusion perform very well, including the two verticals that are called out, healthcare and banking slash financial services. Okay, so now the big question is where does Oracle go from here? Oracle's had a history of looking like it's going to break out only to hit some bumps in the road. And so investors are likely going to remain a bit cautious and take profits off the table along the way. But since the Barron's article came out, we reported on that earlier this year in February declaring Oracle a cloud giant, the stock is up more than 50%. Of course, 16 of those points were from, you know, Friday's move upward. Still, Oracle's highly differentiated strategy of integrating hardware and software together, investing in a modern cloud platform and selectively offering services that cater to the hardcore mission critical buyer, these have served the company, its customers and investors well. From a cloud standpoint, we'd like to see Oracle be more inclusive and aggressively expand its marketplace and its ecosystem. This would provide both greater optionality for customers and further establish Oracle as a major cloud player. Indeed, one of the hallmarks of both AWS and Azure is the momentum being created by their respective ecosystems. As well, we'd like to see more clear confirmation that Oracle's performance is being driven by its investments in technology, i.e. cloud, same-same hybrid and industry features, these modern investments versus a legacy license cycles. We are generally encouraged in a reminded of years ago when Sam Palmosano, he was retiring and leaving as the CEO of IBM at the time HP, under the direction ironically of Mark Heard, was the now company. Palmosano was asked, do you worry about HP? And he said in effect, I don't worry about HP, I worry about Oracle because Oracle invests in R&D. And that statement has proven prescient. What do you think? Has Oracle hit the next inflection point? Let me know. Don't forget, these episodes, they're all available as podcasts, wherever you listen, all you got to do is search Breaking Analysis Podcasts. Check out ETR's website at ETR.plus, ETR.plus. We also publish a full report every week on wikibon.com and siliconangle.com. You can get in touch with me on email, david.valante at siliconangle.com. You can DM me at dvalante on Twitter or comment on our LinkedIn posts. This is Dave Vellante for theCUBE Insights, powered by ETR. Have a great week, everybody. Stay safe, be well, and we'll see you next time.