Oracle – Profitability is the Focus

by Trefis Team
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Oracle (NASDAQ:ORCL) has time and again re-iterated its emphasis on profitability. Oracle acquired Sun Microsystems in early 2010 with a view to strengthen its portfolio of products. Sun was a loss making company at that time, and reported an operating income loss of $2.24 billion for fiscal year ended 2009. [1] This is why Oracle could buy Sun Microsystems at a relatively cheap valuation of $7.4 billion. However, Oracle seems to have converted the losses incurred by Sun Microsystems to profits. By leveraging Sun’s technology, Oracle is trying to come up with a superior product portfolio and maintain an edge over competitors SAP (NYSE:SAP), Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and HP (NYSE:HPQ).

We maintain a $37.94 price estimate for Oracle stock, which stands about 15% above the stock’s market price.

Oracle Improving Profitability

In its acquisition of Sun Microsytems, Oracle primarily acquired hardware products like servers and storage products. According to the company, its hardware business’ gross margins improved to 55% in the most recent quarter (fiscal year Q3 2011). [2] This was a major improvement from the gross margins of around 47% that it achieved during calendar year 2010.

See our full analysis and $37.94 price estimate for Oracle

This core emphasis on sustaining profitability has been reiterated by management since the Sun acquisition. In the company’s recent earnings conference call, management stressed profit margins as a key focus:

“It’s very easy to sell a couple hundred million more revenue in a quarter and decide not to make any money doing it. It’s very easy. People will absolutely buy from you things that you are offering too cheaply. We’re not in that business. We really are in the value business.” [2]

The company also referenced this focus on sustaining profitability during its prior earnings conference call for the fiscal year ended 2010:

“Our plans for Sun is based on a more profit aware model. As we said a number of times, we are no longer selling products at a loss as Sun did. We are now compensating our sales teams on margin, not just revenue, and this has the effect of changing the sales mix from systems where Sun lost money to value-added systems where Sun’s differentiation is clear to our customer. These changes are allowing us to form a base line for our hardware revenues and profitability at a level from which they can grow.” [3]

Clearly, this is a core theme that management wants investors to comprehend. We wouldn’t be surprised to hear it again.

Notes:
  1. Sun Microsystems: FY 2009 SEC annual filing []
  2. See SeekingAlpha: Oracle FY Q3 2011 earnings conference call transcript, March 24th 2011 [] []
  3. See SeekingAlpha: Oracle FY Q4 2010 earnings conference call transcript, June 24th 2010 []
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