Strong Database And Application Software Sales Could Lift Oracle Higher

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Database leader Oracle Corp. (NYSE:ORCL) is the world’s second largest software company in the multi-billion dollar software development market with revenues in excess of $38 billion and a market capitalization over $180 billion. The company competes with other large cap software development companies such as SAP (NYSE:SAP), IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) and also with pure-play cloud companies such as Salesforce.com (NYSE:CRM).

Oracle provides both on-premise and on-demand deployments of enterprise-grade software applications covering the ERP, CRM, SCM, BI and HCM domains. Last fiscal year (ended May 2014), Oracle reported software and software support revenues of over $29 billion. Additionally, gross margins in FY14 for its software division stood at 95.8% making it an extremely important and highly profitable division for the company. New software license sales stood at $11 billion in FY14 while software license update and support revenues held a larger share, posting over $18 billion in revenues.

Below, we take a brief look at various key trends that are shaping the performance of Oracle’s software division. We have a Trefis price estimate of $48 for Oracle compared to its current market price of $41.

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Check out our complete analysis for Oracle

a. Database Software: According to our estimates, Oracle reported approximately $14.26 billion in revenues from its database division, representing nearly 49% of total software revenues in FY14. New database licenses accounted for about $5.47 billion while database support revenues contributed about $8.80 billion in revenues in FY14. The company commands a market share of nearly 48% in the well established and mature Relational Database Management System (RDBMS) market. However, competition of sorts is beginning to emerge in newer technologies and data structures, particularly from in-memory computing and expanding unstructured data reserves.

The company has been aggressive in marketing its newest database offering, Oracle 12c, against strong competition from alternative RDBMS providers, as well as HANA from its rival SAP. This in-memory computing database platform utilizes a vastly-sized main memory (DRAM) to upload the entire data set. This offers performance advantages for real-time analytics, as it eliminates the read-write cycles to disk drives involved with conventional data base analytics. In-memory platforms are increasingly being deployed to facilitate faster transactions for applications where the cost of the extra memory can be justified, including the rapidly expanding online commerce market across the globe.

Additionally, NoSQL databases that are capable of handling unstructured data are gaining traction as vast repositories accumulate in very large, Hadoop-based data centers at major social media and Internet companies, including Facebook, Google and Yahoo. Unlike traditional RDBMS databases which store data in tabular formats, unstructured data consists of a heterogeneous mix of alphanumeric and non-alphanumeric data including images and videos. Oracle recently launched its NoSQL Database 3.0 in two versions, the Enterprise Edition and the Community Edition. [1] A key driver here is the fact that Enterprises worldwide are accumulating similar data sets as they leverage social media for commercial gain.

We expect Oracle to maintain its leadership position in the database market, primarily in the RDBMS space. However, NoSQL databases are expected to play a crucial role going forward in handling operations such as marketing and advertising which are increasing relying on data from social networking platforms.

b. Application Software: Revenues from the sale of application software licenses and updated stood at about $8.83 billion in FY14, accounting for about 30% of total software revenues. New application licenses generated approximately $3.19 billion in sales, marginally higher from a year prior period. Application license updated revenues however had a higher growth rate from FY13, reaching $5.64 billion in sales.

In contrast to its market leadership stance in the database market, Oracle lags behind its major software rival SAP in the application software market. Additionally, the company is ranked third in the CRM application category, which is the fastest growing sub-segment within the application software market, behind Salesforce.com and SAP. The company has made multiple acquisitions to bolster its presence in the CRM sub-segment, particularly SaaS CRM deployments.

Oracle’s cloud sales grew 31% to $475 million in Q1FY15 compared to $363 million in Q1FY14, supported by customer wins and triple-digit growth in bookings from Oracle Fusion apps, Enterprise Resource Planning (ERP), Human Capital Management (HCM) and Sales Force Automation (SFA). [2] Oracle benefited from the string of acquisitions in the CRM sub-segment, adding more than 500 new customers for its cloud business, with its Customer Experience (CX) and Digital Marketing modules being the largest beneficiaries of new customer accounts. [2]

We expect strong top line growth from Oracle Cloud going forward, driven by an increase in customer base. However, given the strong competitive environment in the cloud application software market, margins are likely to trend lower in the near term. Furthermore, overall sales are expected to post softer growth rates in the near term due to a larger contribution from on-premise application software.

c. Middleware Software: Middleware primarily provides software for the development, deployment and management of service-oriented architecture (SOA), thereby facilitating application functionality as a service to other applications via a protocol. Oracle’s main line of middleware software includes Java EE and other developer tools, integration services, business intelligence, collaboration and content management. Its Fusion Middleware product line is an open standard suite designed to facilitate integration between applications from multiple vendors.

New middleware license revenues stood at $2.34 billion in FY14, up from $1.61 billion in FY13. Comparatively, middleware update and support revenues were $3.77 billion in FY14 according to our estimates. Gartner expects strong demand from newer offerings such as low-latency messaging, complex event processing and in-memory data grids, where Oracle has limited presence and growth has slackened. The middleware software market is currently dominated by IBM, which has a 30% market share, with Oracle’s share at 15.3% in 2013. [3]

We expect Oracle’s market share in the middleware market to decline going forward, partly due to its greater focus on maintaining and gaining share in the database and application software markets. However, on a longer term, adoption of in-memory technologies for faster integration across applications, greater availability of real-time operational intelligence in business processes and lower time to value are likely to contribute to product innovation and new product launches in the middleware market. [4]

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Notes:
  1. Oracle Announces Oracle NoSQL Database 3.0, Oracle Pressroom, April 2014 []
  2. Oracle’s (ORCL) CEOs Safra Catz and Mark Hurd on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, September 2014 [] []
  3. Gartner Says Worldwide Application Infrastructure and Middleware Market Revenue Grew 5.6 Percent in 2013, Gartner Newsroom, May 2014 []
  4. ref:2 []