Oracle’s Growth Drivers: Cloud Adaptation & Database Management Systems

by Trefis Team
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Oracle (NASDAQ:ORCL) is the world’s second largest software company in the multi-billion dollar software development market with revenues in excess of $37 billion and a market capitalization over $150 billion. The company competes with other large cap software development companies such as SAP (NYSE:SAP), IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT).

In the recent quarter ended August 31 (fiscal years end with May), the company reported net sales of $8.37 billion, 2.3% higher over the same period in 2012, with an operating profit margin of approximately 33% and net income margin of 25%. Oracle’s top line has seen a bit of sluggishness in the past few quarters due in part to its slow adaptation of Cloud Computing. However, the company recently stepped up on its ongoing Cloud adoption program by establishing news partnerships with Microsoft and, respectively. (See more on this below.)   Furthermore, the company acquired three companies in 2013 to support its increasing footprint  in the Cloud Computing.

In this note, we look at the various growth drivers influencing Oracle’s business in detail. We believe the company’s ongoing transition into Cloud-based computing and the the continued growth in data globally should support consistent long term growth for the company. Our price estimate of $42 for Oracle is higher than the current market price of $34, indicating our optimism in the company’s long term success.

Check out our complete analysis for Oracle

Cloud Adaptation On Track With Acquisitions

Oracle seems to be progressively making its entry into the Cloud Computing market with small acquisitions and strong product offerings. In 2013, the company acquired three companies operating within the booming Cloud service industry to strengthen its presence. The acquired companies (Nimbula, Compendium and BigMachines) are specialized niche players providing services in Cloud Infrastructure, Content Marketing and Sales respectively.

Oracle’s organic Cloud business also seems to be gaining traction, as some existing customers deploy specific applications and services remotely in the Cloud, to compliment other offerings hosted more traditionally in the Enterprise. Recently, the company inked a multi-million pound contract with British communication services provider BT Plc. to transfer the company’s existing HR systems onto its HCM cloud. [1] This allows BT to lower costs and gain efficiencies by outsourcing the burden of  hardware, software  and services support. Oracle, in turn, leverages its scale.

Although its adoption of the Cloud model to date has been relatively slow, Oracle is poised to gain increasing traction in the Cloud. The company is the market an technology leader in the Relational Database market and has strong market positions in Middleware and Application software, as well. By offering seamless transition onto Cloud platforms and increasing the flexibility of its Application and Middleware software, the company will now address both Software-as-a-Service (so-called SaaS, the more formal name for most of the Cloud) and the traditional Enterprise market it has addressed so effectively for years. This increased reach should boost its top line going forward.

Cloud Database Offerings Will be Attractive to Some

The move towards Cloud Computing for most organizations is based on conscious efforts to reduce operational and capital expenses as well as improve process efficiency. The Software-as-a-Service business model that Cloud operators employ is built around the concept of reducing work loads and increasing hardware efficiency for businesses that rely heavily on centralized computing. Quite simply, customers outsource the hardware, software and services required for computing tasks to hosting companies able to offer lower costs through their sheer scale.  The enormous customer adaptation for the first wave of the  SaaS roll-out (with early players like paved the way to the Cloud Computing boom in the new millennium. Yet certain Enterprise computing tasks are more easily outsourced that others.  Arbualbly less compatible to the SaaS model is Database management

Oracle is the market leader in Relational Database Management Systems (RDMS) with a market share of more than 48%. In addition to retaining its strong market leadership position, the company is looking to extend its leadership by offering its database technology to those who prefer it in a Cloud environment hosted and supported by Oracle. In September 2012, the company launched its first cloud database offering, the 12c, to serve customers wanting to shift to cloud. A year later, Oracle rolled out an in-memory option to its 12c cloud database to woo competition from SAP’s HANA in-memory platform, which we note is offered by the king of the Cloud, Amazon’s AWS.  An in-memory application utilizes the main memory in huge volume, uploading data entirely from disk storage to completely eliminate seek times from querying as well as reduce processing time with fewer CPU responses.

Looking ahead, we believe that Oracle will continue to remain the pioneer in the Relational Database market. Oracle’s strong double-digit growth in the database segment in Q1 is due to continuous growth in global data, which fuels the need for advanced Database Management Systems. Although Oracle reported excellent customer response to the 12c Database system during its Q1 conference call, it did indicate that it is still too early to forecast the ultimate penetration of its Cloud database offering. We believe that the transition to cloud will accelerate going forward as global company operations become increasingly streamlined to minimize the operational and capital burden of traditional computing.

Microsoft and Salesforce Partnerships To Support Application and Hardware Sales

Oracle stands second in the Application and Middleware software industry according to Gartner rankings, with a market share that is close to half the market share of leader IBM. [2] Additionally, large players within the industry have been bleeding market share to smaller vendors providing flexible Cloud deployments for Application and Middleware software at cheaper prices. Recently, the company inked three partnership deals with rivals Salesforce and Microsoft to improve its footing within the Application and Middleware market.

The partnership with Microsoft enables Java developers to use Oracle’s database systems and tools on Microsoft’s Azure Cloud platform. Additionally, Oracle will certify and support its Applications, Middleware and Databases systems on the Azure and Server Hyper-V platforms. This deal allows Oracle to help facilitate the move of its users on Windows systems to the Microsoft Cloud (Azure) with ongoing support. [3]

With, Oracle has agreed to a nine-year comprehensive partnership where both the companies will integrate their Cloud offerings across their product portfolios. In short, it will allow Oracle to better support customers who chose over its CRM offering on its other systems.  Salesforce users will be able to leverage Oracle’s Exadata line of engineered systems that offer superior hardware performance and very quick processing rates. Oracle on the other hand will be able to implement its Fusion cloud HCM application suite and Financial cloud platforms across the Salesforce offering. The long partnership should be beneficial for Oracle, especially its hardware division, which has seen constant declines in revenues since the acquisition of Sun Microsystems. [4]

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  1. BT Invests in Oracle HCM Cloud to transform HR systems, BT Newsroom, October 2013 []
  2. The Application Infrastructure and Middleware Market: Reshaping for the Nexus, Gartner Report, September 2013 []
  3. Microsoft and Oracle announce enterprise partnership, Oracle Pressroom, June 2013 []
  4. and Oracle Announce New Strategic Partnership, Oracle Pressroom, June 2013 []
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