Does This Tech Giant Deserve Its Price Multiples?

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

Oracle (NYSE: ORCL) recently announced the release of its Cx Cloud service to help organizations engage customers through the right channel at the right time. The new software delivers key capabilities designed to help organizations improve customer experience for increased customer acquisition and retention. Many of Oracle's software products released this year have enabled the company trade to at price multiples that are beneficial to its shareholders. In this article, I will explain why the growth stories concerning these software products justify Oracle's current price multiples.

Third Quarter Financials

Oracle reported third quarter net income of $2.5 billion. Non-GAAP earnings were $0.62 per share on revenue of $9 billion, which represents a 3% increase over same period last year. Net income totaled $2.5 billion in the quarter, an 18% increase from one year earlier. Software sales rebounded, while hardware sales fell, as Oracle sacrificed volume for higher margin products.

Consequently, Oracle hit $4 billion in quarterly software sales.

"Oracle is on track to deliver the highest operating margins in our history this year because we are focusing on high margin systems where hardware and software are engineered to work together," said Safra Catz, Oracle's Chief Financial Officer.

Why did software sales rebound?

The rise is due to demand for programs that help companies organize data and run operations. According to Oracle executives, the company's software applications run much faster than the applications of rivals such as SAP (NYSE: SAP) and Salesforce.com (NYSE: CRM). Organizational questions are answered at the speed of thought. The software enables organizations to reduce the total cost of ownership.

2012 In Focus

Oracle has seen continued success throughout 2012. It deployed new cloud software, including a platform for building and running applications, databases and business management solutions. In September, Oracle announced new commercial extensions for MySQL Enterprise Edition, delivering enhanced security and high availability options to customers. In October it announced the Oracle Exalogic Elastic Cloud, second generation hardware of the company's flagship engineered system for running business applications. Oracle has a new cloud database, called 12c, which is a sharply different way of accessing a database in cloud computing.

Oracle reported first quarter earnings that were in line with analysts' expectations. The company posted fiscal first-quarter earnings of 53 cents per share, up from 48 cents a share in the year-earlier period. Net income rose 6 percent to $2.6 billion. Revenue decreased 2 percent to $8.21 billion from $8.4 billion a year ago. The technology giant reported that new software sales rose 6 percent from a year earlier to $1.6 billion during the quarter, in line with its own forecasts. Both GAAP and non-GAAP hardware systems products revenues were down 24% to $779 million.

"On a non-GAAP basis, new software licenses and cloud software subscriptions sales grew 11% in constant currency and operating margin increased to 44% in Q1," said Oracle President and CFO, Safra Catz. "Q1 operating cash flow increased to a record high of $5.7 billion.

Oracle also recently announced second-generation releases of its NoSQL database and big data appliance, delivering the kind of user-driven, short-list upgrades that are typical when graduating from a 1.0 release. According to a recent Oracle press release, "The Cx Cloud service software marks the completion of Oracle's development efforts for 2012". The second-generation releases continue Oracle's commitment to enhancing the Oracle Right Now offering following its acquisition. With increasing competition from small web-based companies like Admiral Markets, which is an online Forex trading provider that also provides a platform for trading precious metals, CFDs, stocks, and fossil fuels, Oracle will have to take steps to remain competitive in all of its business segments. 

Oracle's software releases this year included the Cx Cloud service, MySQL Enterprise Edition, Exalogic Elastic Cloud, a new cloud database called 12c, Oracle NoSQL Database 2.0, and much more. It is understandable that Oracle pays attention to software development because it is one of the fastest evolving markets now, and gaining a head start is always wise. It is also clear that with software, Oracle has been consistently improving in comparison to the previous year. Net income has also increased, and Oracle is operating at close to an optimum performance level.

Competitors

Let's see how Oracle is performing against its competitors. Oracle has a profit margin of 28.38%, compared to 15.53% for IBM (NYSE: IBM), 21.71% for Microsoft (NASDAQ: MSFT), 18.60% for SAP, and -8.91% for Salesforce.com. Oracle currently has an operating margin of 38.49%, compared with 20.83% for IBM, 36.02% for Microsoft, 29.48% for SAP, and -3.38% for Salesforce.com. IBM recently announced plans to buy software developer StoredIQ. The acquisition is expected to close in the first quarter of 2013, and the financial terms have not been disclosed.

Summary

Oracle is the biggest maker of database software on the market today. Looking at its software releases in 2012 and its improving margins, I believe Oracle is a strong buy at current price multiples.


StockCroc1 has no positions in the stocks mentioned above. 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!

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