As Cisco (CSCO +1.15%) CEO Chuck Robbins continues to transform that company into a cloud-driven, Internet of Things (IoT), software powerhouse, he's putting it directly in the path of longtime enterprise hardware rival Oracle (ORCL +1.71%). Just glancing at one of Oracle's earnings releases, or listening to one of its quarterly conference calls, will make it abundantly clear that it, too, has plans to ramp up its cloud-based revenue.
Similarities aside, Cisco and Oracle are approaching their respective transformations in slightly different ways. Robbins has Cisco focused on continuing to build its recurring revenue model by emphasizing its subscription offerings. Oracle's cloud patform-as-a-service (PaaS) and software-as-a-service (SaaS) sales have boosted its ongoing revenue too, but that's more of an afterthought for co-founder and CTO Larry Ellison and team. So which is the better buy?
Image source: Cisco.
The case for Cisco
If there were any questions regarding Cisco's commitment to the cloud and IoT, those were laid to rest last quarter. Of the five acquisitions Cisco completed in its fiscal Q3, four were directly related to building its cloud and IoT product suite, including a $1.4 billion all-cash deal for Jasper Technologies.
Jasper instantly gives Cisco a leg up on its IoT competitors with an end-to-end platform designed to help "enterprises and service providers launch, manage and monetize IoT services on a global scale." One report suggests there will be 24 billion connected "things" by 2020, up from 10 billion last year, generating $6 trillion over the next five years.
Combined with Cisco's cloud offerings, which include everything from infrastructure to analytics -- where much of the data captured via IoT devices will be stored and analyzed -- it's laying a solid foundation for long-term growth. Cloud revenue is also helping Cisco meet another of its strategic objectives: boosting recurring revenue.
Cisco's many positives from Q3 included a 3% jump in total revenue to $12 billion , an 11% increase in service sales, and improving margins, deferred revenue climbed 8%. Deferred revenue is a gauge of how well Cisco is delivering on its recurring sales strategy, and with $15.3 billion sitting on the books waiting to be accounted for, it's quickly becoming a reality. To put that into perspective, Oracle generated $7.7 billion in deferred sales last quarter.
Image source: Oracle.
The case for Oracle
Oracle is no slouch in the IoT department either, and much of its focus is utilizing its cloud platform to capture, analyze, and deliver actionable results. Like Cisco, Oracle doesn't break out IoT sales, but its three primary cloud units -- PaaS, SaaS, and Infrastructure-as-a-Service (IaaS) -- all improved again last quarter.
Combined, Oracle's cloud sales climbed a whopping 49% to $859 million in fiscal 2016 Q4, and now account for 8% of total revenue. That's still a relatively small piece of its $10.6 billion in revenue, but its up significantly from last year's 5%. And according to co-CEO Safra Catz, investors can expect more of the same this quarter. After accounting for currency, Catz forecasts Oracle's PaaS and SaaS sales will deliver 75% to 80% year-over-year improvement in fiscal Q1 2017.
Software, which includes new sales, license updates, and product support, continues to provide the majority of Oracle's revenue: $7.58 billion last quarter, equal to 72% of total sales. The bad news is that non-cloud software revenue is declining, and that will likely continue this quarter. The upside is that Oracle's burgeoning cloud business is picking up the slack.
From an investment perspective, Cisco and Oracle share a couple more similarities. Both are at, or near, 52-week highs after climbing approximately 12% year-to-date, trading at 13 times future earnings, and both pay a dividend. However, Cisco's 3.4% yield is one of the highest in tech, and more than twice that of Oracle's 1.46%.
In addition to its stellar dividend, Cisco earns the nod as a better buy than Oracle because of its position as an IoT leader, and its continued success in growing recurring revenue; which in turn equates to relatively stable earnings and steadily improving margins.
