Will Oracle’s Strategy Ensure Long-Term Success?

Oracle is likely to have a hard time ahead with the stiff competition in cloud computing.

Jun 25, 2014 at 4:00PM

Enterprise software provider Oracle's (NYSE:ORCL) fourth-quarter results proved to be a big dampener for the company's supporters, especially considering that this usually tends to be its strongest quarter. While revenue of $11.3 billion failed to meet market estimates, Oracle's non-GAAP profit of $0.92 per share also fell short of analyst expectations of $0.96 per share. As stock prices nosedived by almost 5.4%, Oracle redeemed some of its lost sheen by issuing current-quarterly guidance in line with Street estimates.

Although management has been quick to reassert its goal of making the company the No. 1 cloud services provider, the fact that Oracle is already facing stiff competition from a host of rivals in this space is definitely a point of concern, especially considering the size and breadth of resources of competitors SAP (NYSE:SAP) and Salesforce.com (NYSE:CRM)

A premature goodbye to software services
Oracle's fourth-quarter results highlighted the company's major transition toward cloud computing. New software licensing revenue remained largely flat on a year-over-year basis vis-à-vis the 3.6% growth rate observed during the earlier quarter. For Oracle, that's a clear indication that customers are moving away from purchasing software on an up-front basis and paying monthly license fees to upgrade it.

With cloud computing virtually eliminating the need to install expensive, on-premises equipment, Oracle's hardware segment revenue rose by a meager 2.4%, compared to the 8% growth recorded during the prior quarter.

A big hello to cloud businesses
However, the company's cloud services business, the one that should matter in the long run, proved to be a bright spot during the fourth quarter. While revenue from the cloud infrastructure-as-a-service segment increased by 13% during the period, Oracle's adjusted revenue for its platform -- as well as software-as-a-service businesses -- also rose by a healthy 23%.

Together, they led to an impressive 22% YoY revenue growth ($450 million) in the company's overall cloud business. But then, here's the catch. This $450 million accounts for just 4% of Oracle's overall sales, signifying that the company still has a long way to go to emerge as an established leader in this segment. With research firm Gartner publishing data that reveals an estimated 19% rise in global spending on public cloud services this year, Oracle's cloud services business growth becomes all the more imperative.

Other things that matter
At the same time, Oracle 12c, the company's first cloud-computing database, is also likely to play a big part in its current turnaround efforts. With Oracle having just launched a much faster, updated version of its database software, increased customer adoption of its new "in-memory" technology should also boost sales for the company's software division.

The company is, again, focusing on acquisitions to keep the burgeoning competition at bay. Apart from boosting its cloud services portfolio by acquiring LiveLook, a manufacturer of visual collaborative technologies, Oracle now has its sights set on Micros Systems, which makes software for retailers and the restaurant businesses to bolster their customer bases.

What about the others?
Although Oracle's bigger rival, SAP, has followed the acquisition route to some extent, the latter is also bearing the brunt of the industrywide shift toward cloud computing. Apart from the fact that first-quarter revenue and profits remained short of Street estimates, SAP also had to deal with decreased revenue as a result of a stronger euro.

However, things are a bit different with Oracle's smaller, more fleet-footed rival Salesforce.com. Already the largest manufacturer of online customer relationship management software, Salesforce's current quarterly revenue guidance has managed to exceed analyst expectations. But then, with the company's net loss continuing to widen in its recent first quarter, investors have a reason to worry about its future prospects .

Foolish final thoughts
Oracle's problem has been its late entry into the cloud-computing realm. While companies like Salesforce and Workday have been built around this model, Oracle has had to make a forced transition with the decline in its traditional software services business. Despite the company having made every effort to counter the scenario by acquiring a string of companies in different verticals, Oracle's cloud services business still has less than a 5% share of the company's overall revenue.

This is a company that must contend with a host of problems, including rivals that have grabbed market share by undercutting prices, coupled with internal execution issues involving its own sales force. The road ahead will probably be bumpy for Oracle, and investors should keep a close watch on future developments.

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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.

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