Will Oracle Ultimately Reward Your Patience?
Enterprise software provider Oracle recently declared third-quarter results that failed to enthuse the Street. Revenue at $9.31 billion fell short of market estimates of $9.36 billion, and Oracle's adjusted EPS at $0.68 per share also came up short of expectations of $0.70 per share. Oracle's management attributed this to unexpected currency fluctuations. Share dipped by around 3.6% as a result, Oracle investors had some reason to smile at the end as the company issued current quarterly guidance in-line with the Street's expectations.
That brings us to the big question: Has Oracle really failed to perform over the long-term, or does the Street just expect too much, too soon?
Its showtime for the hardware division!
To start with, for a pleasant surprise Oracle's hardware division revenue rose 8% during the quarter after staying largely flat in the previous quarter. This should come as a huge relief for a company that desperately looked to derive some leverage from its expensive acquisition of Sun Microsystems a few years ago.
The result also serves as a stamp of success for the much-touted "engineered systems" that Oracle developed in an attempt to replace the older Sun Micro servers. Oracle's revenue from such systems went up by an impressive 30% during the period.
Heading for the clouds
However, with market research firm Gartner predicting a mere 3.1% increase in global tech spending this year, Oracle knows that it can no longer rely on sales of conventional networking equipment. While the reduced rate of tech spending growth largely comes as a result of the prevailing adverse macroeconomic situation, it has also given rise to the newer segment of cloud computing -- something that companies are increasingly adopting to avoid the cost of expensive on-site hardware. In fact, the very same data from Gartner reveals 18.5% growth in global expenditures on public cloud services this year, which makes the importance of this segment all the more evident.
Oracle has tried to make up for its late entry into the world of cloud services by spending a fortune to acquire a string of start-up organizations, most recently Responsys and BlueKai. However, investors still waiting to see the results of these buys, and the company faces competition.
A cutthroat world
While a large part of Oracle's acquisition-related strategy has been similar to that of rival SAP AG of Germany, it's the smaller competitors Salesforce.com and Workday that have together become a big headache for the company. That's because they have been steadily eating into Oracle's market share and attracting customers by lowering prices so much that the software behemoth has struggled with its profitability.
This is not to say that those competitors do not have any problems of their own. For instance, having secured its presence in the U.S. market, Salesforce has now revealed its global aspirations with a plan to set up data centers in Europe. Given the fact that this will require lots of capital, investors will probably worry about the company's declining bottom line in recent quarters and the marked rise in its capital expenditures.
Oracle's other competitor, Workday, displayed stupendous 71% year-over-year revenue growth. However, its operating losses have also continued to increase at a steady pace, which puts a big question mark over the company's theory of growth at the expense of profitability.
Climbing up the ladder
That brings us to the other piece of good news for Oracle. After they remained largely flat during the previous quarter, the company's sales of new software licenses and cloud subscriptions went up by 3.6% during the latest reported period. That should please potential investors, as new software licenses lead to maintenance contracts that last for long periods and provide constant sources of cash for a company.
With Oracle's subscription-based cloud revenue going up by a healthy 24%, the best part seems to be the substantial 60% jump in order bookings for cloud services after a 35% rise during the previous quarter. Oracle has attributed a large part of this performance to its revamped sales force and it has already outlined plans to hire specialist sales personnel dedicated to cloud computing.
Some Foolish final thoughts
Things are probably not that bad for Oracle. The company's hardware division won't be written off anytime soon. Oracle also seems like it has finally gained some ground in the cloud computing realm. While the pace of progress has admittedly been a bit slow, you simply cannot expect a company of Oracle's size to see overnight success in a relatively new technological segment. Then again, the company's small, yet aggressive competitors also need to show some profits.
Investors should not forget that this company has excellent free cash flow which it effectively channels through an impressive dividend and a share-buyback program. While the time may be a bit early for making any fresh acquisitions, patient investors are likely to see rewards by the end of this year.
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The article Will Oracle Ultimately Reward Your Patience? originally appeared on Fool.com.Subhadeep Ghose has no position in any stocks mentioned. The Motley Fool recommends Salesforce.com. The Motley Fool owns shares of Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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