Here's Why Some Partners Think Oracle Cloud Sales Numbers Are Misleading

Oracle executives say the company's cloud computing business is growing like gangbusters, but some partners told CRN this week that they don't think Oracle's cloud sales figures tell the real story.

The numbers, taken at face value, are impressive. Oracle's Software-as-a-Service and Platform-as-a-Service bookings grew more than 200 percent year over year last quarter, while revenue grew 34 percent to $419 million. Oracle's Infrastructure-as-a-Service sales grew 31 percent, to $160 million.

Despite lackluster sales of its traditional software products, Oracle "dramatically overachieved in the cloud" last quarter, co-CEO Safra Catz said on the vendor's Q4 earnings call last week.

[Related: Oracle Misses Big In Q4, But Its CEOs Say Cloud Business Is Growing Like Gangbusters]

Co-CEO Mark Hurd said Oracle had $858 million in annual recurring revenue from cloud sales during its recently concluded fiscal year and expects between $1.5 billion and $2 billion next year.

"Clearly, our cloud business has entered a hyper-growth phase," Oracle Chief Technology Officer Larry Ellison said on the call.

However, three Oracle partners told CRN they're not putting much stock in these claims. They say because Oracle is offering lucrative incentives to its salespeople for driving cloud business -- up to five times their normal commissions in some cases -- some are selling customers cloud products they don't need.

"This is a huge incentive for creative sales reps to add cloud onto existing orders, even if the customer has no interest or intention of using the cloud service. Oracle's cloud numbers are definitely misleading," said one of the partners, who didn't want to be named.

An Oracle spokeswoman told CRN that the claim that Oracle customers aren't using the cloud offerings they purchase "is absolutely not true."

"Each customer has to go through a contract negotiation process and sign off on every line item in the contract," said the Oracle spokeswoman.

And yet the partners said there are two common scenarios in which Oracle salespeople are getting customers to purchase cloud offerings as part of non-cloud deals.

In the first, Oracle sales reps are offering discounts on large software purchases if customers agree to buy "cloud credits," which are licenses they can redeem for Oracle cloud products.

For a customer that needs to buy $1 million in net new Oracle software licensing (after discount) for a budgeted, on-premise project, Oracle sales reps will knock the price down to $800,000 if they agree to buy $200,000 in cloud credits, the sources told CRN.

The customer also saves money on its software support renewal, which costs 22 percent of the total amount of software they buy. After the first year, the customer can renew support based on the $800,000 figure as opposed to the $1 million figure.

So instead of paying $220,000, the customer pays only around $176,000, and doesn't have to renew the cloud credits, said the partners.

"The customer is buying cloud as a way to reduce their support renewal, not necessarily because they want to use Oracle cloud products," said one of the partners. "It's possible that customers will take advantage of their cloud credits and buy more from Oracle, but I haven't seen a scenario where they actually 'want' cloud."

This scenario is very lucrative for Oracle sales reps. At a 6 percent commission rate, they'd get around $60,000 for the straight $1 million on premise software deal. But when $200,000 in cloud products is added to a deal, at a 30 percent commission rate, Oracle sales reps get around $108,000, the partners told CRN.

In the second scenario, when Oracle audits a customer's software usage and discovers they're out of compliance, the vendor is offering to waive back support and retroactive licensing costs if the customer agrees to buy cloud credits, said the partners.

"In this kind of audit situation, customers are willing to do this to make Oracle go away," said one of the partners.

It's not unusual for enterprise vendors to use sales incentives to drive sales of particular products, and the Oracle spokeswoman said this is common practice for the vendor.

"We always have incentive plans as part of compensation. There are incentives on cloud, on engineered systems, etc. We have been selling cloud for multiple years," the Oracle spokeswoman said.

But Oracle -- facing pressure to transition to cloud due to multi-quarter declines in traditional software sales -- isn't just touting cloud sales growth, it's talking about dominating a cloud market in which it was a late entrant.

"We are doing what you very rarely ever see happen in our industry. We are getting bigger and our growth rate is expanding. We will be the world’s largest enterprise cloud company," Ellison said on last week's earnings call.

While Oracle may yet fulfill Ellison's pledge, CRN's sources said right now, it's just another longtime enterprise software vendor attempting to transition its business to the cloud -- a move that has proven difficult for many of its peers.

PUBLISHED JUNE 23, 2015