Oracle's Performance Dwindles as the Dollar Strengthens

abhisht is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Oracle’s (NYSE: ORCL) adjusted new software licenses and cloud software subscriptions ($1.6 billion) & software license updates and product support ($4.1 billion) revenues were up 6% and 3%, respectively. Unfortunately, its adjusted total revenue ($8.2 billion) and hardware systems products revenues ($779 million) were down by 2% and 24%, respectively. Despite falling revenue, Oracle reported adjusted EBIT of $3.6 billion, which was up by 1%, and adjusted operating margin was up 44%. Oracle’s adjusted net income was up 6% to $2.6 billion.        

The fall in revenue is due the impact of the US dollar strengthening compared to foreign currencies. If the dollar did not gain strength, the results would be on positive side. On the basis of constant currency the revenues would be up by 3% adjusted new software licenses and cloud software subscriptions revenues would have been up 11%, while adjusted hardware systems products revenues would have been down 21%.

Management has reconfirmed its stand on organic growth with their focus on increasing the sales force’s specialization to drive greater adoption of Oracle’s stack to its 390,000-plus customers. This approach likely means that Oracle will have longer ramp  times for reps to become productive.

To grow organically, Oracle has made new hires from last year, which means that after some time has passed productivity should improve; all this will be supportive of continuing margin expansion. I also believe that Oracle’s management has streamlined sales compensation to eliminate double quotas from most reps, to encourage focused selling of only one product. This will further help to consolidate its stand on organic growth.

Even though there is lot of pressure on the management to make some large acquisitions, given the strong portfolio, there is less possibility of Oracle making acquisitions unless they are very much a need. Instead Oracle will continue to return cash to shareholders via buybacks and dividends.

There are many segments, notably Network and Systems Management, where Oracle is not a prominent player. But in the age of acute diversification no company can master all the products of its industry.

In comparison to IBM (NYSE: IBM), many of the customer who are using IBM P770 (which is IBM' s most popular model) are shifting to the Exdata model of Oracle because it takes less man hours (approx. 59% less) and gives better performance. Apart from this it is quicker and more efficient than the IBM P770. In this way Oracle is eating away IBM's market share.

For SAP (NYSE: SAP), it is very difficult to change as its business evolves, which means that it can also be more difficult to modify the software to adjust to evolving core processes and requirement. Hence, lack of flexibility gives Oracle an upper hand over SAP.

I believe that it is beneficial for Oracle to provide its software applications to customers over the Internet. Many years now, I do also note that the company has had relatively limited experience providing truly SaaS applications. Although Oracle faces some challenges integrating recently made acquisitions, macro sensitivity, and technologic disruption, its strong basic & fundamentals will allow it to sail against the tide and come out as winner.

Oracle has strong balance sheet and flourishing P&L, which along with the urge to grow shows that there is still a lot of room left for the company to run, and hence should be bought. 

akgupta88 has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle. Motley Fool newsletter services recommend International Business Machines. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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