There Is Still Plenty to Love With Oracle
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As dominant as database giant Oracle (NASDAQ: ORCL) has been over the years, it has always resented being in the shadows of Microsoft (NASDAQ: MSFT) when it comes to enterprise business services. Today, it finds itself in a similar predicament. But this time, it is salesforce.com (NYSE: CRM) surging out of nowhere and forcing Oracle to react to the ever-changing demands of cloud-based services.
Oracle is forced to make these adjustments while fighting off giants such as IBM (NYSE: IBM), Hewlett-Packard (NYSE: HPQ) and SAP (NYSE: SAP) which are all eager to eat away at its business and market share. But it’s no easy task. The company continues to prove what it means to have become a victim of your own success. It seems that its string of market beating performances have raised the bar so high that perhaps even it can’t maintain. Nonetheless, it has always had a lot to prove. Its fiscal first-quarter report was the perfect proving ground.
The quarter that was
On Thursday, Oracle reported revenues of $8.2 billion for the three months ending in August – representing a drop of 2%, missing the Street's expectations by $200 million. However, the company did generate net income of $2 billion or $0.41 per share, which was an increase of 11% on a GAAP basis. On a non-GAAP basis, EPS arrived at $0.53, in line with street estimates.
As an admitted long time Oracle cheerleader, I will concede that the numbers were pretty uninspiring. Not only were the top-line results weak, but its outlook suggest that the coming quarter will be more of the same as it lowered revenue expectations to $9 billion while the analysts were expecting sales 0f $9.2 billion. But that was the extent of the bad news.
What came as a surprise was Oracle announcing not only a pretty significant share buyback program, but also igniting investors with higher-than-expected growth in its software license segment. This was in addition to proclaiming new cost-cutting measures put in place to spark shareholder value. As exciting as these revelations were, it was not as compelling as what followed.
During the call, I felt some chills hearing the company’s CEO, Larry Ellison, boast about how Oracle is essentially taking its rivals such as IBM and Microsoft to the woodshed, smacking them around and taking their lunch money. What’s more, in terms of the cloud and its future, aside from hinting that there will be new developments to the company’s cloud strategy, Ellison said the following:
Exadata, Exalogic, Exalytics and our other engineered systems grew more than 100% in the quarter. For the full year, we expect to double engineered systems sales to well over $1 billion. Oracle’s new cloud business is also approaching a $1 billion annual run rate. These two businesses will drive Oracle’s growth for years to come.
This leads us back to my introduction - Oracle has always had a lot to prove. As Ellison noted above, his company has its sights set on the future, and it expects both its growth and its market-beating performances to continue. Ellison continues to show that he and his team are not only able to move Oracle in the right direction, but also that the company plans to taking down its rivals in the process.
As well as Salesforce.com and another rival such as EMC (NYSE: EMC) appears to be performing, I don’t think Oracle has much about which to worry. With its leading business applications and leading database software solutions, the company will continue to face much stronger demand for its products, particularly with its increasing integration in business software, hardware, platforms and use.
With the stock now trading at $32, its growth projections suggest a fair market value of $35 - this is even on the most conservative assumptions. The bullish case for Oracle is simple, as businesses continue to strive for growth, it will place more demand on IT services. And as IT services get more complicated, it will require the level of expertise that Oracle provides to manage these complications.
Oracle realizes that it cannot rest on its laurels because the competition for its current business as well as those heading for the cloud is growing fierce – particularly from IBM and Microsoft. However, the question is, can it overcome weak enterprise spending all while adjusting to a sector that has now begun to consolidate? Though these questions remain, I would not want to bet against Ellison.
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rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Microsoft, and Oracle and has the following options: short JAN 2013 $150.00 calls on Salesforce.com and long JAN 2013 $150.00 puts on Salesforce.com. Motley Fool newsletter services recommend Salesforce.com. 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.If you have questions about this post or the Fool’s blog network, click here for information.