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Investment Overview for Oracle (NASDAQ:ORCL)
- Oracle Database Software Licenses Market Share:
Oracle's Share in Database Software Licenses Market was around 47% in 2012. We currently forecast Oracle's market share to steadily increase, reaching about 48% by the end of the forecast period. We expect it to maintain its lead, and its cloud-based database offering to help it capture market share in the on-demand segment. However, due to increasing competition in the space from SAP, Microsoft, Salesforce.com and others, it may not be able to capture more market share, and may even lose some. If its database market share declines to less that 40% by the end of the forecast period, there could be a 5% downside to its current Trefis price estimate.
- New Application Software Licenses:
Oracle has managed to grow its Application software business steadily in the past. Its revenue from application software was nearly $3.05 billion in 2012. It recently launched Fusion Apps, to make its application software available as an on-demand, cloud-based offering. We expect its application software revenue to increase to $5 billion by the end of the forecast period. However, due to increasing competition in ERP, CRM and other segments from other enterprise software giants like SAP, IBM and Salesforce.com, Oracle may not be able to increase revenue from this segment if Fusion Apps fails to gain traction. If its revenues stay flat throughout the forecast period, there could be an 7% downside to its current Trefis price estimate.
Marketing, Advertising & Operational Expenses
- SG&A as a % of Gross Profit:
We currently expect Oracle's selling, advertising and operational expenses (SG&A) to increase from close to 27% in 2013 to 30% by the end of the forecast period. Given the increasing competition in the enterprise software market with a lot of other deep-pocketed enterprise giants, it may have to spend much more to push its products to enterprise customers. It may also have to ramp up its operational expenses if it wants to expand at a faster pace.
If its SG&A expenses as a percentage of gross profit increase to more than 34% by the end of the forecast period, there could be a downside of about 5% to our Trefis price estimate.
Oracle makes money by selling crucial database, application, and middleware software primarily to medium and large businesses worldwide. Companies use Oracle software to more efficiently collect, process, and store important customer and business information.
Each of these three steps--collection, processing and storage--can be thought of as corresponding to one of Oracle's three main software offerings. Application software is used to collect information from customers directly or through employees (e.g. through web forms). Middleware software is commonly used to process information collected through the application layer; and, finally, the information is stored in Oracle databases through interactions with the middleware software layer.
The database software segment is Oracle's most valuable segment for the following reasons:
High Database Market Share
Oracle began as a company focused on relational databases and despite its expansion into middleware software, application software, and even server/storage hardware through its acquisition of Sun Microsystems, Oracle remains the market share leader in database software. We believe that Oracle's Database market share in the ~$14.6 billion new database license market was nearly 34% in 2012, trailed primarily by IBM and Microsoft
High Software Renewal Rates and Customer Stickiness
Software license renewals by existing Oracle Database, middleware and application customers is a crucial part of Oracle's value. Oracle customers are primarily medium-to-large businesses, including most companies in the Fortune 1000. The IT departments of these companies invest significant resources in optimizing their Oracle software and many IT staff become highly proficient in Oracle software through usage and formal certification programs. These client investments in Oracle create "sticky" customers which is evidenced by software license renewal rates of 95%.
High Software Renewal & Support Fee Margins
In addition to high software renewal rates, Oracle benefits from high gross profit margins on license renewals and support fees associated with new license sales, making Software Renewals & Support Fees Oracle's most profitable business.
The rise of cloud computing
Cloud-based, on-demand software is becoming increasingly popular in the enterprise. Oracle announced the launch of the Oracle Public Cloud in October 2011. Through the Public Cloud, Oracle will make its database, middleware and other Fusion applications available to customers as a subscription based cloud-based offering. We expect Oracle to become a major player in the enterprise cloud computing market. Oracle's recent acquisitions of cloud-based software providers like RightNow and Taleo will help it gain market share in the enterprise cloud software market.
Fusion Apps to help Oracle in ERP and CRM Market
Oracle released Fusion Apps, a complete suite of ERP and CRM applications, in October 2011. It will be available as standard on-premise software, as well as a part of the Oracle Public Cloud. With Fusion Apps, Oracle aims to offer a complete suite of resource planning, customer relationship management, human capital management, supply chain management, project planning and financial software to enterprise customers. It could help Oracle gain additional share in those markets where it competes with SAP and Microsoft.
Exadata and Exalogic becoming key products for Oracle
Exadata machines are high performance machines and is a complete package of servers, storage, networking and software. Exalogic machines provide a complete cloud-computing infrastructure for the deployment of applications. Oracle believes that these products will continue to drive its software and hardware growth.
Oracle's software also become faster through Exadata
Database software mainly consists of two segments: online transaction processing (OLTP) and data warehousing (DW). The OLTP and DW segments of database software serve different purposes, but both segments benefit from faster servers. DW databases are useful for uploading bulk data. For example, end of day operations in a bank will use a data warehouse database. Online transaction processing (OLTP) databases are used for recording transactions in real time. For example, normal ATM transactions during the day will be stored in OLTP database real time.
Oracle trying to counter SAP's HANA with Exalytics
SAP has been marketing its high performance, in-memory computing appliance, HANA, to enterprises since 2011, to gain additional market share in the business intelligence and analytics market. Oracle's answer to SAP's HANA is its Exalytics appliance, which it launched in Q1 2012. It announced a feature and performance upgrade for TimesTen, its in-memory database which powers Exalytics, and is expected to push Exalytics heavily to its existing enterprise customers going forward.
SaaS applications growth benefiting Oracle
SaaS software applications such as customer relationship management (CRM) and enterprise resource planning (ERP) are deployed alongside database and middleware software. These applications require both servers, on which they are hosted, and storage hardware, for backing up of the data. This is where Oracle’s Exadata line of servers enters the picture. The Exadata servers are faster machines that provide an infrastructure for SaaS players to host their applications.
Internet Growth Driving Database Market
As the Internet user population increases, the demand for data maintenance will also increase.
Applications Revenue Growth Highly Dependent on Corporates IT Budgets
Due to the recessionary environment, companies have cut back IT budgets, and are spending on new applications deployment, as it is considered a discretionary spending. We expect the growth to rebound in line with improving general economic environment.
Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) are the applications most dependent on macroeconomic conditions; and hence we expect a decline in revenue growth in these applications.
ACQUISITION OF SUN MICROSYSTEMS
Oracle announced its acquisition of Sun Microsystems in April 2009. Sun makes servers, workstations, and offers a suite of software products including the Solaris Operating System, the Java platform and MySQL database. We have incorporated Sun into our forecasts for Oracle. The Enterprise Servers and Storage segments correspond to business segments inherited from the Sun acquisition. Sun's various software products have been incorporated into the corresponding existing software business segments of Oracle.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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