Oracle: Better Late Than Never

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

In my last article on tech behemoth Oracle (NYSE: ORCL), I had stated that merely blaming the company’s sales staff for its poor third quarter performance (when the results missed analyst expectations by a wide margin) was not the true picture as presented by the company’s management. And it seems like my words have come true as revenue came in below Street expectations as part of the company’s fourth quarter results once again, and that too, in the company’s traditionally strongest fourth quarter, when sales people attempt to close as many deals as possible in the hope of securing a year-end bonus. This time, however, management has decided to opt for the economy as its newest scapegoat.

But, as company shares plunged slightly more than 9% upon the results, it has become evident that these explanations are unlikely to have a soothing effect on increasingly jittery investors. And distributing goodies in the form of doubling the quarterly dividend or going for a massive $12 billion share buyback may just not be enough to control the situation. So how about blaming Oracle’s slow moving culture and flawed revenue strategies for a change? Especially when smaller rivals such as Salesforce.com (NYSE: CRM) and Workday (NYSE: WDAY) are increasingly taking a major share of the pie, something which Oracle is finding real hard to control, even with its string of recent acquisitions that include Taleo Corp., RightNow Technologies and Eloqua.

The cost factor

So what is the real reason behind the meager 1% rise in the company’s new software licensing and cloud subscription-based revenue? Well, as is evident in recent quarters, the answer lies in the fact that customers are simply unwilling to go for the expensive costs and licensing renewals associated with Oracle’s engineered systems – combinations of hardware, software and databases that it’s originally reputed for. And while it’s definitely true that Oracle’s software tends to be better and much more sophisticated than its smaller rivals and even compared to traditional rival SAP AG in some respects, people are just not willing to pay the high prices that are inevitably associated with such advancements.

While that may be an aftereffect of the economic slowdown that has forced corporate IT departments to go on a cost-saving spree, the fact remains that customers will always be drawn towards the fact that companies such as Salesforce and Workday offer Software-as-a-Service (SAAS) based applications at a fraction of the cost that Oracle charges, not to mention eliminating the need to install expensive on-premise hardware. These companies bundle their charges for installing software and providing maintenance support into a single, affordable fee, taking it to a level that simply turns out to be unprofitable for big companies such as Oracle.

Small is better

In fact, some of them such as Salesforce are even willing to run at a loss for some time and grab more customers from behemoths like Oracle in the process. And even though this led to Salesforce reporting net losses to the tune of $270 million in the previous year, the gains are evident as Oracle slips into second place behind the former in terms of SAAS-based applications. At the same time, Salesforce’s offerings in the realms of human resources, customer service management (CRM) and accounting continue to be as diverse as possible.

Oracle’s other smaller competitor Workday also continues to run at a loss like Salesforce, but at the same time has a distinct policy of marketing its software in a way that has made it accessible from multiple devices such as tablets and smartphones, the harbingers of modern-day communication. Workday’s clever customer mix of small, medium as well as big companies has also helped it to reduce dependence on any single customer – always a good thing for any upcoming company.

But that’s not all as Workday has very smartly targeted Oracle and SAP customers at the very time when they are supposed to upgrade their in-house vendor software, making the advantages of a switchover all the more obvious.

The ‘Mr. Softy’ angle

Having said that, all is not lost for Oracle, and there are some definite pieces of good news that should bring a smile to the faces of potential investors. The first of these centers around the tie-up with Microsoft, another tech behemoth that is fighting to survive in a post-PC world, as the two companies enter into a collaboration whereby Oracle’s 12c cloud-based software will be offered as a part of Microsoft’s Azure cloud-based application. Incidentally, the 12c is Oracle’s first ever public cloud offering, where applications tend to reside in shared servers. While this highlights Oracle’s obvious need to popularize its newest cloud-based offering as soon as possible, even if it means tying up with an old enemy like Microsoft, the collaboration would surely add to its revenues and expand the customer base.

Microsoft, on the other hand, would certainly welcome this partnership, as Oracle’s reputed offerings such as Java and Linux should help its Azure initiative to counter the dominance of Amazon’s web-based services. Oracle has announced collaborations with Salesforce as well, but then the latter already runs Oracle’s databases and the terms of the deal are as yet unclear.

At the same time, Oracle’s management claims that the company has acquired up to 500 new customers for its cloud-based offerings and has also actually performed well in otherwise downmarket regions such as Europe. With its newest customer list boasting of big names such as eBay and Yahoo!, things should look up on the revenue front for Oracle in the upcoming quarters.

Some parting thoughts

Oracle’s present situation invites pessimism on all fronts, but there is still a ray of hope for the future. What is particularly needed is a complete change in attitude on behalf of management, which needs to realize the real issues faced by the company at present. Having said that, the announced partnerships with Microsoft and Salesforce are good steps in this direction.

At the same time, pricing is another aspect that the company needs to have a close second look at. I would recommend holding on to this stock for some time more, but this is definitely not the time to make any fresh purchases. One should do well to wait it out until things unfold a little bit more for Oracle.


Subhadeep Ghose has no position in any stocks mentioned. 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!

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