The $3 Billion Reason Why Oracle Is Nearing Its All-Time High

REUTERS/Robert GalbraithOracle CTO Larry Ellison.

Oracle's stock is up more than 8% Thursday to over $44, after the company reported better-than-expected sales and profits Wednesday.

That's the highest the stock has been in years, and it approaches its all-time high of $45.46 from July 2000, during the heady days of the internet bubble.

The reason why investors are so giddy? To paraphrase Meghan Trainor: "It's all about that cloud, 'bout that cloud ..."

Oracle will sell "well in excess of $1 billion" of new annual cloud subscriptions next year, chairman and CTO Larry Ellison said during the quarterly conference with analysts. That $1 billion in new bookings is in addition to the $2 billion in cloud revenue it is already on track to earn this year (in the current quarter, it earned $516 million from cloud services).

So by the end of next year, Oracle's cloud business should be on a $3 billion annual run rate, well on its way to hitting the major industry milestone of $1 billion per quarter.

The $4 billion mark is a major milestone for cloud-computing companies. Microsoft in November said its cloud was on track to be a $4.5 billion business next year. But as we previously reported, that $4.5 billion number isn't straightforward and is influenced by how Microsoft bundles its products together when companies renew their software contracts.

Pure cloud company Salesforce.com just hit over $4 billion in revenues in its last fiscal year and expects to hit $5.3 billion at the end of its current fiscal year. It took it 15 years and a major acquisition, marketing automation company ExactTarget.

Cloud market leader Amazon is about to pass the $4 billion in revenue in 2014, too. (It doesn't report cloud revenue, but does lump it into its "other" category, which hit $3.9 billion in fiscal 2014's first nine months.)

To be sure, $1 billion, or even $3 billion a year, is peanuts compared to the $6.8 billion Oracle earned from its software business just last quarter. But cloud contracts are tallied differently. Companies pay less for them up front and more for them over time, and so cloud vendors can only report the revenue as it it is earned. That $3 billion worth of bookings is really worth a lot more money over time.

And most importantly, Oracle promises its going to hit that $3 billion number while still growing its traditional software business, not cannibalizing it.

In other words, it says it is gaining hundreds of new customers every quarter, not just moving them from regular software installed in their data centers (known as on-premises) to the cloud.

Ellison says cloud customers are coming from those who would have chosen competitors Workday and Salesforce.  And, he says, these companies are buying multiple cloud products from Oracle because Oracle has become a one-stop shop for everything, from hardware through every possible cloud product they might want.

"Look at our product portfolio," CTO Larry Ellison said on the call. "Who wins in all of these battles? The suite vendors always beat the point solution guys. It's happened in every generation of computing where the end user, the customer, doesn't want to be the integrator of 30 separate applications from 30 separate vendors. No different now, just on the cloud now."

All told, Co-CEO Mark Hurd says the company added 860 new software-as-a-service customers last quarter, with more than 230 of them ordering more than one cloud service. For its human resources cloud that competes with Workday, Oracle signed on 230 brand new customers and nearly 150 brand new customers for its financial software cloud customers, he said.

Better still, co-CEO Safra Catz promises that the company is doing this while preserving fat 46% operating margins.

"I am very pleased with where margins are laid out this quarter, and as we get to volume, I actually think we are going to do better -- continue to do better," she said.

And that's a hugely sunny outlook for Oracle, who has wavered for the past few years as it revamped itself: overhauling its legendary salesforce, learning how to become a hardware company and building and acquiring its way into the cloud business, all while keeping its bread-and-butter database business alive.

Here's Oracle's all time stock chart:

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