Will Oracle Continue to Soar on Increasing Margins?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oracle (NASDAQ: ORCL) is one of my favorite stocks because of the consistent quality of its outstanding performance and the handsome rewards that it has produced for stockholders. I believe that Oracle will continue to grow smartly because of the innovative strategic moves that it continues to make to protect its dominance in its operating markets and to capitalize on new growth areas. Recent research has shown that it is the number one company for future database applications and that its initiatives in developing infrastructure will continue to strengthen its competitive position. The company is a developer of databases and software which are designed to help companies achieve an optimal operating performance. Its enterprise software makes it easier for companies to integrate the separate parts of their operations while the database support provides high-quality timely data to improve the quality of decision-making and the formulation of future strategies. The company operates in three business segments software, services and hardware.
In its software business, in addition to product sales, the company also generates revenues through consulting services on the design of enterprise architecture, product upgrading and improvement as well as training to customers and associates in its education business. It provides a range of hardware for networks and service providers without any form of dependence on Hewlett-Packard (HPQ). It has filed an appeal to the court in its lawsuit against SAP AR (NYSE: SAP). SAP has already agreed to pay $306 million for copyright infringement but a Californian jury has determined that the damages should be $1.3 billion.
The company has moved quickly to rectify the security bugs in its Java software which had rendered it vulnerable to hackers. This quick response was necessary in order to retain the trust of its customers. The security has been kept by experts to confirm that the updated version is now flawless. A recent survey carried out by Piper Jaffrey shows that when it comes to database management and cloud computing, Oracle is right on top along with Microsoft (NASDAQ: MSFT) and salesforce.com (NYSE: CRM), Windows 8 is expected to introduce new dimensions in cloud computing because people can store and manage their data through the Internet across many servers and Oracle is well prepared to cash in on this opportunity.
Oracle announced better than expected results for the fourth quarter of 2012 on the back of increases in sales on new software licenses and announced that it would buy back an extra $10 billion under its share repurchase program. A 1% gain was achieved in revenues for the quarter which amounted to almost $11 billion against a consensus estimate of $10.89 billion. New software sales which are an indicator of future growth rose to $4 billion which is a good performance in a weak economic environment. Most global technology companies like Oracle and IBM (IBM) are preparing for weaker technology spending in the face of the troubles in Europe and a slower than expected recovery in the United States.
Net income increased by 8% to $3.45 billion (EPS of $.69 per share) compared to $3.21 billion (EPS of $.62 per share) on a year-on-year basis. Based on adjusted earnings, the EPS works out to $.82 a share against the consensus estimate of $.78 per share. Revenues from Europe, Africa and the Middle East declined by 7% reflecting the impact of the economic uncertainty. The server hardware division acquired through its acquisition of Sun Microsystems continues to be a burden on the company as sales declined by 16% to $977 million.
Oracle has also spent a large sum of money over the past few months to boost its capabilities for social enterprise and networking because, as a provider of ERP solutions, it has to have a wide range of solutions to meet the requirements of its customers. As Google has found out, building social networking expertise from scratch is not an easy process and acquisitions are a sensible solution to the problem. The most recent acquisition was social marketing company Involver and though the deal size has not been disclosed, it is not thought to be a very large sum of money. Oracle will now have the capability to provide the tools for social media marketing for brand building. This is the greatest of three acquisitions to provide it with the requisite capabilities.
About a month ago, the company acquired Collective Intellect to boost its suite of analytical tools. This acquisition provides it with the capability of tracking customer conversations on social networks such as Twitter and Facebook for better interaction and more customized marketing. It will be integrated into the Oracle cloud computing platform. Earlier, to strengthen its cloud computing capabilities, it spent $300 million on the acquisition of social media marketing company Vitrue to sharpen its social media marketing skills on sites such as Facebook and Youtube. These are for additions to its SaaS offerings which should set up a future revenue stream.
Oracle appears to have built up these impressive capabilities at a much lower cost than its competitors. Salesforce.com also made a strategic marketing acquisition with its purchase of Buddy Media for $689 million but this is significantly more than any single Oracle acquisition. Microsoft's acquisition of Yammer for $1.2 billion is quite different but, it is the social networking solution for employees within a company and is used by over 80% of the Fortune 500 companies. SAP has made the largest acquisition forking out $4.3 billion for Ariba, a specialist in enterprise applications which will boost its cloud computing offerings.
I have always admired Oracle for its ability to take decisive strategic positions, and there is no better testimony to this skill than the increase in operating margins for the last four consecutive quarters. Having built up its social media marketing capabilities much cheaper than the competition, there is little doubt that these operating margins are going to be sustained. Once again, the company is well positioned to outperform the competition, and I have no hesitation in recommending this stock.
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