Searching For This Software Giant's Next Target
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Despite a highly profitable database software business, Oracle (NASDAQ: ORCL) has seen the future and wants a bigger piece of the so-called cloud computing services market that is delivered via internet-connected devices. The company has made some acquisitions in the space lately, including Taleo, RightNow Technologies, and Eloqua (NASDAQ: ELOQ). However, the combined effect of these transactions has not been big enough to make a dent in Oracle's revenue growth, which has logged just a 0.6% increase in FY2013. That is why Oracle needs to think bigger with its $35 billion cash and securities hoard. A good place to start might be Concur Technologies (NASDAQ: CNQR).
Making Travel Easier
Founded in 1994, Concur is the leading provider of software solutions for managing companies’ travel and entertainment (T&E) expenses. After payroll spending, T&E expenses are typically a company’s largest discretionary cost and are subject to significant waste and fraud. Concur’s internet-based software allows its customers to connect with travel providers and provides improved post-trip, analytical capabilities. More importantly, the company's products create time and cost efficiencies in a huge, global industry that a company like Oracle could leverage with its suite of software products.
In its latest fiscal year, Concur reported revenues and operating income of $439.8 million and $16.5 million, increases of 25.8% and 75.2%, respectively, versus the prior year. The company increased its operating efficiency during the period as it continued to add customers to its user base, which included 18 million people in 100 countries as of September 2012. While Concur predominantly serves the U.S. market, it is investing resources to support growth in international markets, including the 2011 acquisition of U.K.-based GlobalExpense and the creation of a joint venture in Japan. The U.S. market accounted for 85% of total sales during FY2012, but the company’s future growth will increasingly be generated by the growing emerging economies of the Asia-Pacific region.
Chasing the Competition in the Cloud
Oracle continues to chase the leader in the customer relationship software segment, Salesforce.com (NYSE: CRM). Founded in 1999 by a former Oracle executive, the company is a provider of various enterprise planning software products that help solidify a company’s relationships with its customers. It has also been moving into the social networking software segment through the acquisition channel, including the 2012 purchases of 2Catalyze and Buddy Media for a combined price of $786 million.
In FY2013, Salesforce.com has continued its solid growth trajectory, with increases in revenues and adjusted operating income of 35.5% and 40.0%, respectively, compared to the prior-year period. Despite generating 17% of its total sales from Europe, the company has shown its value proposition by delivering double digit sales gains in all of its geographic segments. On the downside, Salesforce.com’s gross margin has slipped in the current period, and it continues to spend heavily on marketing, which cost the company 53% of sales versus only 19% at Oracle. Investors are expecting significant future growth from the company, valuing Salesforce.com at a price multiple of over 100 times adjusted net earnings.
The Bottom Line
Oracle needs to justify its $35 billion cash pile that is generating very little sitting in U.S. treasuries. Given that the pile keeps growing, with operating cash flow of $6.5 billion in FY2013, Oracle has three choices: return the money to shareholders through large repurchases or dividends, create a large technology services and financing business, or grow through acquisitions. Given the company's historical business model, I would bet on the latter as a likely course.
Acquisitions have become part of the corporate make-up of Oracle over the past decade, including high-profile acquisitions of PeopleSoft and Sun Microsystems. While its acquisitions in the hardware space have brought it some useful technologies, including control of the Java programming language, Oracle's hardware segment has reported disappointing results, with FY2013 declines in revenues and operating profit of 17.8% and 16.3%, respectively, versus the prior-year period. The recent $800 million acquisition of Eloqua will provide Oracle with a leading position in the performance management software segment, but it won't do much for its income statement in the short term. Eloqua reported revenues of just $68.8 million through the first nine months of FY2012 and continues to generate operating losses.
While Concur is richly valued at roughly a 70 P/E multiple, it would fit nicely into Oracle’s bundled software offerings that are increasingly delivered via the internet. It dominates its market niche, with 60% of the Fortune 500 currently using its products, and the company serves a travel market that is expected to continue growing, in line with rising business globalization trends. Even better, Concur's annual revenues of half a billion dollars would provide a nice boost for Oracle's $6 billion cloud software segment. You never know where Oracle's billionaire chairman Larry Ellison might strike next, but Concur is a good bet for the future.
rghanley owns shares of Concur Technologies. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!