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.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers