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Investment Overview for Oracle (NASDAQ:ORCL)

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Update and Support Revenue

• On-Premise Software Licenses: The revenue for this division has remained around the $26 billion mark for the last three years. We expect on premise revenues to decline as the company transitions towards cloud and saas based products.
  

SaaS and PaaS

• SaaS and PaaS: With the launch of Oracle's Gen 2 cloud and autonomous database, we expect divisional revenues to grow from $4.7 billion in 2018 to more than quadruple to $21.6 billion by 2025.
  

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Oracle makes money by selling crucial database, application, and middleware software, primarily to medium and large businesses worldwide. Companies use Oracle's software to more efficiently collect, process, and store important customer and business information.

So far, Oracle had been primarily providing these software on an on-premise basis, in which the software is hosted locally at the client's location. Now, given the ongoing industry-wide trend, Oracle is aggressively transitioning to cloud-based software and platforms, known as the cloud computing model. In this model, the software and computing capacity is hosted offsite on remote servers, which clients can access through the Internet.

An important distinguishing factor between the two is that while legacy on-premise software were sold on a licensing basis, the cloud computing software are provided on a subscription-based business model. Further, the licensing model involved recurring revenues from providing software updates and maintenance services to licensees, and revenues therefrom significantly surpass revenues from new license sales. On the other hand, such support revenues are a much smaller proportion in the cloud computing model, since the need for regular updates and maintenance is replaced by an annual subscription fees.

Oracle also sells servers, storage and networking hardware to business enterprises across the world. It acquired a bulk of its hardware operations through its acquisition of Sun Microsystems in 2010. Subsequently, Oracle entered the integrated systems market through its so-called "engineered systems" product line. Integrated or engineered systems are high-value, high-margin products that combine software, server, storage and networking hardware into a single, ready-to-ship product. In FY'17, Oracle acquired NetSuite for $9.1 billion.

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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, it remains the market share leader in database software. With a 44% share of the $12 billion database software market, Oracle is the clear and undisputed leader globally.

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 Oracle's 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.

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The rise of cloud computing

Cloud-based, on-demand software is becoming increasingly popular among enterprises. Oracle announced the launch of the Oracle Public Cloud in October 2011. Through the Public Cloud, Oracle makes 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 acquisitions of cloud-based software providers like Datalogix and MICROS Systems 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. 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 and Exalogic are 'engineered systems', which are high performance machines that are a complete package of servers, storage, networking and software. They fall under the 'integrated systems' category, which is a $8 billion market. Oracle leads this market with a 55% share and 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 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. 

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?

1. We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
2. 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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