Oracle (NASDAQ:ORCL) Looks to the Cloud

By  SEP 26, 2012 12:50 PM

The software giant is struggling to gain traction in the hardware business. But its innovative new products and an improving US economy should give it a boost.


Oracle (NASDAQ:ORCL) has a long history of buying up smaller software companies whose products nicely complement its own technology.

This year, for example, its purchases are running at a rate of about one per month. Its latest came on September 17, when it added SelectMinds, which helps businesses use social media to recruit new employees, for an undisclosed amount.
On July 30, Oracle snapped up Xsigo Systems, which makes cloud computing technology. Oracle has also used acquisitions to expand into other industries: In August 2010, it bought Phase Forward, which makes applications for health-care and life-sciences firms, for $685 million.
Sun Microsystems Acquisition Changed the Face of Oracle
One of its biggest acquisitions so far was computer-hardware maker Sun Microsystems, which Oracle bought for $7.6 billion in 2009.
Until this point, Sun’s servers had been sold with Oracle’s database software, but the combined company aimed to better leverage the strengths of both by providing businesses with an integrated solution: Oracle servers running the company’s latest software right out of the box.
Here’s how Oracle put it at the time:
Each layer of the stack will be architected to improve performance, leverage innovation and centralize management so that IT will be more predictable, more supportable and more secure. Customers will benefit as their system performance, reliability and security goes up and their system integration and management costs go down.
The deal also gave Oracle two of Sun’s most attractive properties: the Java programming language and the widely used Solaris operating system, in addition to the company’s long experience in the server business. Since then, the purchase has enhanced a number of Oracle’s products. For example, in 2010, the company launched the Oracle Exadata Database Machine X2-8, which incorporates Sun’s server hardware and Oracle’s software. Oracle now claims that its newest Exadata machines are the fastest servers on the planet.
Latest Earnings From Oracle Reflect Ongoing Hardware Struggles
Oracle operates through three main divisions: Software (which accounted for 70% of its revenue in the latest quarter), Hardware (16%), and Services (14%).
In the three months ended August 31, 2012, Oracle’s sales fell 2.3%, to $8.18 billion from $8.37 billion in the same quarter last year. That fell short of the consensus estimate of $8.4 billion. Software sales gained 4%, but that was offset by a 19% decline in Hardware revenues and a 6% slide at the Services business.
Despite the slow sales, profits rose 11%, to 2.03 billion, or $0.53 a share, from $1.84 billion, or $0.36. If you exclude one-time items, profits would have risen 6%, to $2.61 billion, or $0.53 a share, matching analysts’ expectations. That’s partly because Oracle continues to lower its costs: Operating expenses declined 7% in the latest quarter.
The company’s hardware business continues to face stiff competition from major competitors, such as International Business Machines (NYSE:IBM), Microsoft (NASDAQ:MSFT), and Hewlett-Packard (NYSE:HPQ).
As well, many businesses are putting off IT purchases in the face of a number of global storms, such as the ongoing eurozone debt crisis, the still-sluggish US economy and slowdowns in China and other developing economies. According to the Institute of International Finance, corporations in the US, the eurozone, the UK, and Japan are now sitting on a record $7.75 trillion in cash and short-term investments. That’s an obvious negative for IT investments right now, but it points to strong potential for a wave of spending on new computers, servers, and software once corporate managers feel the economy is returning to a more solid footing.
Meanwhile, there is rising optimism surrounding the prospects for Exadata and other new products that Oracle is developing. Analyst Trip Chowdhry of Global Equities Research is among those who feels that the company is on the right track. In a recent article, he said: "What investors need to focus on is, are they losing market share?... Our answer is ‘no.’ And is their research and development pipeline strong? Yes.”

Big Potential in Cloud Computing
The company is also looking to cloud computing for growth. Under a cloud computing model, businesses access data and software on remote servers, either directly or over the Internet.
Here again, Oracle feels its integrated approach—offering both software and hardware infrastructure—gives it an edge over IBM and SAP AG (NYSE:SAP), which focus on hardware and software, respectively.
Cloud computing does pose some challenges for Oracle, however. For example, it could lower the number of internal hardware companies need to run their businesses. In addition, cloud applications are often sold on a subscription or metered basis instead of an upfront license sale. Such a transition would lower Oracle’s initial sales but would provide more predictable revenue streams. Nonetheless, the company continues to fully embrace the cloud:
“A little more than a week from now, we will announce lots of enhancements to the Oracle Cloud,” said Oracle CEO Larry Ellison in the earnings release. “There are more CRM, ERP and HCM applications as a service, and more Oracle database, Java and social network platform services.”
US Election Should Bring Some Clarity
Another event that should help spur more corporate investment, including in information technology, is the November presidential election. Many in the investment community feel that Mitt Romney’s policies make him business-friendly, but no matter what the result, with the election behind us, corporations will have a better sense of the regulatory and taxation framework for at least the next four years.
That could help shake some of that massive cash hoard loose—and put Oracle in a great position to attract more corporate customers.
This article by Chad Fraser was originally published on Investing Daily.

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