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Wait Before You Invest in Oracle

April 23, 2014 | About:
jaggom

jaggom

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Enterprise software provider Oracle (ORCL) recently declared third quarter results with revenue at $9.31 billion that missed the analyst’s estimate and the Street expectation of $9.36 billion. Oracle's adjusted EPS at $0.68 per share was also short of expectations of $0.70 per share. The unexpected currency fluctuations led to the results as quoted by Oracle's management.

A Look at the Performance

Oracle's hardware division revenue rose 8% during the quarter after staying largely flat in the previous quarter. That brings a huge relief for a company that is desperately looking to extract some boost from its expensive acquisition of Sun Microsystems a few years ago.

The much-touted "engineered systems" that Oracle developed in an attempt to replace the older Sun Micro servers delivered satisfactory results with revenue from such systems up by an impressive 30% during the period.

The market research firm Gartner predicts a mere 3.1% increase in global tech spending this year. Oracle cannot just rely on sales of conventional networking equipment. The prevailing adverse macroeconomic situation has reduced the rate of tech spending. It has also given rise to the newer segment of cloud computing which the companies are increasingly adopting to avoid the cost of expensive on-site hardware. This is further solidified by the fact that there is 18.5% growth in global expenditures on public cloud services this year as revealed by Gartner.

Oracle has tried to cover its losses by its late entry into the cloud computing business acquiring a string of start-up organizations like Responsys and BlueKai.

Against Peers

Oracle's acquisition-related strategy is very similar to that of its rival SAP AG of Germany. Its smaller competitors Salesforce.com (CRM) and Workday (WDAY) are giving stiff competition to the company by steadily grabbing some pieces of Oracle's market share. They are attracting customers by reducing their prices so much that Oracle has struggled with its profitability.

Now having secured its presence in the U.S. market, Salesforce has further revealed its global aspirations with a plan to set up data centers in Europe. If it materializes, it will require a lot of capital and would worry investors due to Oracle’s declining bottom line in recent quarters, and the rise in its capital expenditures.

Oracle's other competitor Workday has displayed impressive 71% year-over-year revenue growth. However, its operating losses have also continued to increase at a steady pace which endangers the company's theory of growth at the expense of profitability.

The company's sales of new software licenses and cloud subscriptions went up by 3.6% during the latest reported period while remaining largely flat during the previous quarter. This must be pleasing for potential investors since new software licenses lead to maintenance contracts. These contracts last for long periods and so, they provide constant sources of cash for a company.

Oracle's subscription-based cloud revenue went up by 24% and it recorded a whopping jump of 60% in order bookings for cloud services after a 35% increase during the previous quarter. This extraordinary performance is attributed to Oracle’s revamped sales force.

Oracle has finally gained some ground in the cloud computing realm. But, the pace of progress is a bit slow. This is obvious looking at the size of the company which cannot witness overnight success in a relatively new technological segment.

Conclusion

Still investors can bet on the company’s excellent free cash flow which it effectively channels through an impressive dividend and a share buyback program. As fresh acquisitions might take some time, investors must be patient to look for the fruitful results by the end of this year.


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