Oracle's Acquisition Strategy Prompts Growth
Fani is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
For tech companies seeking to meet customers' demands rapidly, investing in strategic acquisitions has always been a top priority. Oracle Corporation (NYSE: ORCL), the leading specialist in computer hardware and business software, remains one of the biggest spenders within the industry. Over the past six years, the firm has bought more than 70 companies. Critics have often been harsh on Oracle's acquisition activities. However, what are the facts telling us?
Recently, Oracle was included in Gartner's 2012 Magic Quadrant for integrated revenue and customer management for CSPs report, reflecting the firm's solid position within the market. In addition, Oracle was recognized by analyst firm, Analysys Mason, as the global market leader in customer care. The analysis identified Oracle as the “go-to” communications service provider and highlighted its product-focused strategy.
Oracle's latest financial report showed record numbers in many areas. The company beat the Street's expectations and ended the second quarter of fiscal year of 2013 with accelerated earnings. Non-GAAP EPS stood at $0.64, up by 18% compared to last year. Total revenue stood at $9.1 billion marking an increase of 3%. Oracle's cloud offerings of competitive applications, as well as the firm's complete database and Java platform services, enhanced its cloud business leading it to a $1 billion run rate. Revenue generated from new software licenses, and cloud software subscriptions followed an upward trend of 17%.
Moreover, recently, Oracle announced its decision to acquire Eloqua, a leader in marketing automation. This was the latest in a string of software deals. It came two years after the technology giant bought Eloqua's competitor, Market2lead, and just seven months after the acquisition of Virtue, a specialist in social marketing services. The Eloqua deal is expected to increase Oracle's market penetration by adding more than 1,000 customers to its clientele. Oracle is evidently aiming to strengthen its marketing automation expertise and enrich its competitive advantages.
For its hardware business, Sun has proven to be a highly lucrative investment. Oracle bought it in 2010. Since then, the integrated technology and resulting optimized solutions have enabled strong performance in the engineered system segment. For Q2 fiscal 2013, hardware systems revenues amounted to more than $1.3 billion, up by 15% over the same period last year.
Overall, Oracle had a robust financial and operating performance, which led to fruitful cash flow in excess of $13 billion. The balance sheet showed an almost $28.8 billion differential between total current assets and total current liabilities. This was more than enough to support the firm's aggressive growth strategy and allow it to sustain an accelerated cash distribution of $0.18 per share.
Oracle vs the Rest
Although competition from companies like International Business Machines (NYSE: IBM) and SAP AG (NYSE: SAP) remains fierce, Oracle has been able to post double-digit growth rates across all of its core businesses, and sustain a clean balance sheet. In terms of financial discipline Oracle remains well ahead of its peers. It has a current ratio of 3.33, which is above the industry's median, as well as, above IBM's and SAP's same variable.
Last month, a federal judge castigated IBM and the SEC over their $10 million settlement covering foreign bribery allegations. IBM is alleged to have bribed Chinese and South Korean officials to secure the sales of IBM products in Asia. The judge is not satisfied with the course of the settlement and is asking for a broader reporting on possible wrongdoing. The firm's lack of adequate internal control undermines its credibility and soars its vulnerability against fraud risks. For the most recent quarter, IBM delivered lackluster performance in all of its major segments. Revenues were hurt by a double-digit dip in hardware sales, and negative currency effects. In addition, North America, the firm's largest market, delivered weak results, indicating a gloomy demand environment.
In an effort to diversify its financial resources, SAP is considering listing in Shanghai. For the German software giant, China is a comparably profitable place to do business. During the third quarter of 2012, SAP witnessed a 40% jump in its software sales in the Chinese market. The firm holds a €1 billion mid-term sales goal in the country, and also plans to invest about $2 billion expanding its regional operations. Overall, fundamentally, SAP is looking strong. With a 68% gross margin, it reveals solid control of expenses. According to Morningstar, it has a 12.5% five-year growth forecast. Nevertheless, SAP is trading with a PEG ratio above the norm of one, and five times sales, suggesting that now might not be the right time to start a position on this stock.
So far, Oracle has outperformed the market and some of its peers. Throughout 2012, the stock performed strongly and returned over 30% of its value. IBM's one year stock returns stand at roughly 4.7%. At the moment, Oracle is trading with comparably attractive valuation metrics pointing to a possible investment bargain. Also, the firm expects FY13 Q3 diluted non-GAAP earnings per share to be in the range of $0.64-$0.68, suggesting consistent accelerated growth potentials. Out of 46 analysts tracked by Wall Street Journal, twenty six give it a “strong buy” rating while four suggest that it will overweight the market.
Overall, the company's acquisition strategy allowed it to establish a strong foothold in the competitive application software industry. The diversification of its product portfolio and continuous service improvements are leading the way towards augmented profits and increased shareholder value.
FaniKel has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines Corp. and Oracle Corp.. 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!