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Oracle Corp. Facing New Challenges
Posted by: Damian Illia (IP Logged)
Date: April 22, 2014 05:16PM

Oracle Corporation (ORCL) has been selling a wide range of enterprise IT solutions since 1977. This company is currently one of the largest database and enterprise Software providers, now also offering hardware products and services due to a recent diversification of its product pipeline. The integration of hardware and software has enabled the company to successfully lead small but fast-growing segment of IT spending.

During fiscal 2013, the firm reported revenues of $37.22 billion, working under three segments: Software, Hardware Systems and Services. Each of them contributed to total revenues 74.0%, 14.0% and 12.0%, respectively. Through Software segment the company offers new software licenses and software license updates and product support, receiving fees from license to use Oracle’s database, middleware and applications software products, as well as subscriptions from cloud software contracts, software product upgrades and maintenance releases. The firm also offers personalized support services, including the Lifetime Support policy, product enhancements and upgrades. The hardware systems segment offers hardware systems products and hardware systems support, including servers, storage products, networking components and operating systems, and also provides maintenance services and technical support along with component updates and product repairs.

Finally, through the Services segment the Oracle offers consulting assistance, managed cloud services and education. This segment provides services in the areas of business strategy and analysis, process simplification, solutions integration, hardware and software maintenance services and mediabased and Internet-based training for the use of its software products.

Its products are sold both through indirect channels, such as original equipment manufacturers (OEMs), distributors, large account resellers (LARs) and value added resellers (VARs), and subsidiary sales and service organizations. The company is currently focusing on its core products and customer base, and the results have been positive so far, with a revenue growth of 3.9% to $9.3 billion. The evolution to cloud products is being followed by Oracle, and has been able to hold to its customer base. Indeed the company needn’t be the first innovator within the cloud systems in order to maintain its strong position in the market, as Oracle has successfully anticipated the risk of cloud computing and provided its customers with a path for technology and service upgrades. Still, cloud computing represents a threat to Oracle's applications businesses, and the company will have to slowly move its customers to its own cloud solutions.

The Market

Oracle has no doubt a dominant position in the market, and the expected increase in spending on enterprise software of 6.8% will certainly be a strong tailwind for the company’s sales, benefiting from this increased spending. Moreover, the spending on Software-as-a-Service (SaaS) and Cloud-based services are also expected to upsurge, offering the opportunity to further grow its sales. Oracle will have to focus more on developing an innovative product pipeline, following the market’s requirements. It has recently launched low-cost engineered systems, teaming up with Salesforce.com Inc (CRM), Microsoft Corp. (MSFT) and NetSuit Inc. (N).

Its most operational markets — database, applications, storage, and cloud computing — are fiercely competitive, and companies like Microsoft, Corp. (MSFT), Sybase, SAP AG (SAP), Hewlett-Packard Company, (HPQ), IBM, Corp. (IBM), EMC Corp. (EMC) or Teradata Corp. (TDC) present a hazard for the company’s profitability. Oracle will have to differentiate its products and make them more attractive while facing severe pricing pressure and lengthy sales cycle in its core business. This is expected to hurt profitability, and the entrance in the cloud computing business will furthermore place new competitors, challenging Oracle to increase its performance as to avoid this strong competition hurting margins in the long run.

Acquisitions

Oracle has been active on acquisitions, seeking to enhance and increase its product lines. In the list of enterprises acquired by Oracle, there are Acme Packet, Eloqua, Taleo, RightNow, Endeca, Vitrue Collective Intellect and Sun Microsystems. The company has spent in the last 10 years more than $40.0 billion to acquire 80 companies. This important investment however has had a negative impact in the balance sheet, with a high level of goodwill and intangible assets. Seeking to take profit of the increasing demand on cloud services, Oracle has been acquiring companies as to develop new products and catch up with peers like Salesforce.com Inc. (CRM) and IBM Corp. (IBM). Furthermore, the saturation of the market might lead these acquisitions to a lower-than-expected performance, hurting profitability going forward. Moreover, acquisitions always imply integration risks and costs. Indeed the adding of Sun has made Oracle the foremost player in the database software market; however, its integration is still on track.

Pursuing different strategies to increase its product line and differentiate its products with high-value technology, Oracle has recently released new products. Oracle Eloqua for Manufacturing, which will enable improved marketing performance and efficiently. The company seeks to improve customer experience and drive revenue, and new Eloqua for manufacturing, a flexible and scalable industry-specific marketing automation solution will enable the companies to deliver targeted and personalized interactions with customers. Another recent release from Oracle is the Virtual Computer Appliance X4-2, which enables rapid and easy software-defined infrastructure deployment for virtually any x86 application and workload. This release delivers increased computing power, faster data processing and cloud lifecycle management capabilities via its integration with Oracle Enterprise Manager 12c.

Final Thoughts

Third quarter results were rather disappointing, as both earnings and revenue fell below analysts’ estimations with earnings of $0.65 (including stockbased compensation but excluding other non-recurring items and related tax effect) and revenues of to $9.32 billion. Oracle is highly indebted, with an aggregated of $24.17 billion of outstanding notes payable (including current position) as of Nov. 30, 2013. Therefore, interest rate might negatively impact its profitability. Still Oracle has a strong cash balance ($36.97 billion) and free cash flow ($14.62 billion) which enables it to pursue growth strategies as well as share repurchases and consistent dividend payment. The company continues to pay dividends and has hiked the payment to $0.12 from $0.06 per share.

The rapid adoption of engineered systems and cloud suites might lead to incremental top-line growth, going ahead. Moreover, higher subscription revenues are expected to provide a high-margin revenue base. Still competition is stiff and this may hurt margin expansion in the near term. Also small IT companies provide cheaper support for Oracle's software products, putting pressure on the firm's maintenance revenue streams. The company will have to adapt its business model to a subscription mode, and this is a very hard thing to do. Oracle will have to prove its professionalism and effectiveness in order to adapt its products to a subscription model while developing new cloud-based products and solutions.

Disclosure: Damina Illia holds no position in any of the stocks mentioned.



Stocks Discussed: ORCL, CRM, MSFT, N, SAP, HPQ, IBM, EMC, TDC,
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