On Mar 6, we updated our research report on Oracle Corporation ORCL. The company’s fiscal second-quarter 2015 results gained significantly from its cloud business. Earnings came in line with the Zacks Consensus Estimate, while revenues surpassed the same. We believe that the rapid adoption of engineered systems and cloud suites will drive top-line growth in 2015.
Oracle enjoys a dominant position in the enterprise software and database management system (DBMS) software market. According to market research firm Gartner, global spending on IT infrastructure is estimated to grow 2.4% to $3.8 trillion in 2015. Among infrastructure, Big Data and digitalization initiatives are likely to contribute the majority of DBMS market growth. We believe that Oracle’s leading position in the DBMS software market will make it the primary beneficiary of this increased spending.
Oracle is gaining ground in its cloud business as is evident from its second-quarter performance, which fared better than salesforce.com. We believe that the company’s partnership with cloud content management service provider, Box, will facilitate better management of their digital assets on Oracle Marketing Cloud. Going forward, we believe that the partnerships with Salesforce CRM, Microsoft MSFT and NetSuite along with the recent acquisition of TOA Technologies will provide a significant boost to Oracle’s cloud-computing endeavors.
Oracle’s long-term goal is to drive margin growth through the sale of differentiated and high-value technologies.The company is pursuing various strategies related to its hardware business, which are expected to drive growth going forward. The company is focusing on selling integrated high-end servers, storage and software systems to large enterprises. This will likely result in a more profitable product mix.
Oracle faces significant competition in most of its operational markets (database, applications, storage and cloud computing) from the likes of EMC Corp. EMC, IBM Corp. IBM, Hewlett-Packard HPQ, Microsoft, Sybase, SAP, Salesforce, Workday and Teradata. The trend toward consolidation is intensifying the competition for Oracle in most of these markets.
So, large vendors are entering into alliances or partnerships to offer integrated and differentiating solutions. As a result, Oracle continues to face severe pricing pressure and lengthy sales cycles in its core business, which is hurting profitability.
Further, while Oracle’s growing cloud business is a significant positive, we believe that the business model transition will hurt revenue growth over the next couple of years. The company expects to gain a significant part of its revenues from SaaS compared with legacy on-premise licensing business.
However, SaaS revenues will not be recognized upfront as in the case of license business, which will hurt top-line growth in the near term. The company’s growing low-margin IaaS business will also hurt profitability over the long run.
Oracle has a Zacks Rank #3 (Hold).
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