Meaghan McGrath, analyst at TBR, said Oracle’s acquisition-paved road to cloud dominance runs through cloud ERP powerhouse, NetSuite.
When Oracle founder, executive chairman and CTO Larry Ellison took his stance on Oracle’s June 2016 earnings call, that Oracle would beat then- (and still-) leading Salesforce to $10 billion in annual SaaS and PaaS revenue, acquisition alarms went off at TBR. As we wrote at the time “With Salesforce on track to draw $10.5 billion in that segment by CY18, TBR believes Oracle can only reach this milestone first with additional, large acquisitions, on top of its 3Q16-closed Textura and Opower purchases, rather than finding an organic 113 percent CAGR over the coming two fiscal years.”
While today’s acquisition of NetSuite adds only $673 million in TTM (July 1, 2015 – June 30, 2016) subscription revenue to Oracle’s $2.2 billion in TTM (June 1, 2015 – May 31, 2016) SaaS and PaaS revenue, the larger revenue growth potential comes in the cross-selling opportunities of Oracle’s broader portfolio of cloud software into NetSuite’s large SMB customer base, the ability to accelerate NetSuite adoption through Oracle’s large enterprise appeal distribution channel resources, as well as other natural synergies across the businesses.
NetSuite improves Oracle’s ERP position to help win the cloud applications war
Amid Oracle’s efforts to build out its cloud portfolio and become the leading cloud vendor, ERP has not been the focus for prior acquisitions. Instead, cloud acquisitions over the last two-and-a-half years have predominantly been centered on building out Oracle’s Marketing Cloud and Data Cloud capabilities. While those services do differentiate Oracle from other cloud vendors and position it well in the marketing cloud space, Larry Ellison himself admitted that “[t]he leading applications vendor in the cloud this generation will also be whoever wins the ERP war.” Oracle has not been the one winning that cloud ERP war—Oracle-foe, SAP has; but together NetSuite and Oracle can more aggressively threaten SAP’s position.
Though these vendors have seen initial traction in the cloud applications space, the shift of ERP deployments to public cloud is overall slower than CRM and HR workloads because of the complexity of ERP implementations and demand for industry-specific customizations. In the early stages of cloud ERP adoption, TBR’s 1H16 Public Cloud Customer Research indicates that SAP’s and Oracle’s shares of adoption in the ERP space have declined marginally over the past year, in favor of NetSuite.
Although SAP and Oracle have been migrating on-premises customers to cloud, legacy perceptions around complexity plague these vendors and drive customers to look for easier, more agile options. NetSuite’s adoption spike among respondents signals a shift where customers are starting to trust public cloud for even the more complex workloads; however, this shift will be slow overall with faster pockets in different industries.
Of note, Oracle’s acquisition of NetSuite does add an immediate incremental increase in revenue and customer base, but simultaneously brings those customers who had strategically chosen a smaller, more nimble NetSuite as their business applications vendor, into the mammoth ecosystem that is Oracle. There is potential for this merger to immediately alienate both existing and future NetSuite customers who want to avoid navigating larger-scale vendors like Oracle. Moving forward, customers will have to weigh the potential drawbacks of doing business with a large legacy vendor like Oracle with the increased vertical expertise and breadth of business solutions that Oracle’s portfolio offers over the more narrow portfolios of still-autonomous and smaller cloud-native vendors like Salesforce, Workday, and others.
Similar roots and objective synergies indicate a natural blend of businesses
NetSuite got its start in 1998 as one of the first cloud companies with the help of a personal investment from then-Oracle CEO, Larry Ellison. Despite growing questions of a conflict of interest between his own Oracle software business and NetSuite, Ellison remained a majority investor in NetSuite’s 2007 IPO and thereafter. In the midst of this connection to Oracle by Larry Ellison, NetSuite hired former Oracle Vice President of Marketing, Zach Nelson, to CEO in 2002. These common roots lend to similar corporate cultures, and bring into question Larry Ellison’s intentions and potential 20-year forethought upon original investment and continued support.
The strategy alignment between Oracle and NetSuite to run-the-customers’-entire-business make this acquisition a logical purchase for the emerging cloud giant. While NetSuite’s expertise and revenue majority come from its ERP suite, the company’s broader goal is to be the software running behind an entire business, not just one function; aligning well with Oracle’s goals of being the one-stop-shop for businesses. This notion holds especially true in the SMB and mid-market spaces, where NetSuite has seen success, as customers look for integrated cloud solutions to easily deploy and scale with their growing and changing business needs.
NetSuite will support Oracle’s downmarket push with expertise in public cloud applications and the SMB space, while Oracle’s large enterprise and vertical expertise will help expand NetSuite’s addressable customer base as well. Recent NetSuite efforts to build up its e-commerce offerings and tailor solutions to specific verticals will blend with Oracle CX Cloud solutions and find support from Oracle’s Global Business Units’ industry expertise, respectively.
As NetSuite challenged SAP in the SMB and mid-market cloud ERP space, the largest advantage that SAP had was its complimentary on-premises capabilities (whereas NetSuite only offered public cloud), and its broader and more comprehensive distribution channel. Though NetSuite had begun scratching the surface of meaningful international partnerships that would begin to fill this void, its acquisition by Oracle immediately gives it access to more than 25,000 worldwide partners.
Overall, Oracle’s pending acquisition of NetSuite is a logical merger of two businesses that have similar aspirations to be the single software provider running customers’ entire business. NetSuite’s current subscriptions will add to Oracle’s revenue base as Oracle aims to accelerate cloud growth to reach over $10 billion in annual SaaS & PaaS revenues.
Further, NetSuite’s install base of primarily SMB and mid-size customers will provide cross-sell opportunities for Oracle’s expansive cloud suite, and NetSuite’s solutions will see greater growth potential through Oracle’s industry-oriented businesses and global distribution routes. NetSuite’s competitive cloud ERP solution will also improve Oracle’s competitiveness as it challenges Salesforce, SAP and others for cloud applications dominance.
