Oracle Corporation (NYSE:ORCL) Has Both The Ability And Potential To Make It In Cloud Business

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Oracle Corporation (NYSE:ORCL) is a late entrant in the cloud computing business, a dubious distinction that has left many investors doubtful about the company’s ability and potential to succeed in the cloud. The fact of the matter is that Oracle is late to cloud, but the company’s opportunity in cloud is also underappreciated. Data points clearly show that Oracle’s cloud progress is on the right track. In fact, compared to other enterprise cloud providers, Oracle is in a better position to garner a greater share of profit in the cloud computing space.

Oracle’s cloud offerings fall into three categories, namely Software as a Service (SaaS), Platform as a Service (PaaS) and Infrastructure as a Service (IaaS). Of the three categories, SaaS and PaaS are leading the company’s cloud campaign. Oracle expects its cloud offerings to become accretive to revenue, margins and profits almost at the same level or better than its traditional on-premise software business.

Highlight of Cloud revenue

Revenue in Oracle Corporation (NYSE:ORCL)’s cloud division, especially SaaS and PaaS is expanding at a rapid rate. The company reported a 30% increase in SaaS and PaaS revenue in the third quarter of 2015, including adverse impact of currency translation terms. Cloud revenue accounted for 5% of the total revenue in the recent quarter. Total revenue in the third quarter was $9.3 billion, representing flat growth year-over-year.

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Source: Company’s filings and ResearchCows

The rapid expansion in cloud revenue shows how Oracle is aggressively driving its cloud agenda. To keep its cloud business growing, Oracle has been increasing its offerings and bolstering its cloud-focused sales team at the same time. The company has also not given up on strategic acquisitions and it is among the names being cited as targeting Salesforce.com, Inc. (NYSE:CRM) for a buyout deal.

Oracle is looking forward to $1 billion in new cloud revenue this year and has its eyes set on overtaking the global cloud leader, Salesforce. A look at Oracle’s various cloud efforts leave no doubt about the company’s ability and potential to succeed in the market category, especially once cloud becomes its mainstay.

More cloud products

Oracle Corporation (NYSE:ORCL) plans to deliver 95% of its products through the cloud before the end of this year. The company is currently offering 65% of its products through the cloud. Oracle has been rewriting its product portfolio so that it can offer them through the Internet. The rewrites have taken place mostly in areas like database, middleware and applications, with more work to be done in areas like industrial solutions.

Customers are adopting Oracle’s portfolio of cloud offerings, allowing the company to reference them for more sales. While Oracle is busy rewriting its products to bolster cloud offerings, the company is not abandoning its legacy on-premise software business, but looking at providing customers with more options.

Cloud-focused sales team

As Oracle Corporation (NYSE:ORCL) works to rewrite its existing products and build new ones for cloud delivery, strong distribution channels are crucial to the success of the cloud business. For that reason, the company has been very active in building a sales organization that is able to drive its cloud business to the desired success.

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The company is aggressively expanding its cloud sales organization, recently announcing expansion in the Asian-Pacific. The company is interested in the region because of its emerging cloud market, especially being driven by mobile and broadband proliferation.

Beyond the Asia-Pacific region, Oracle has, in recent years, been trying to modify its sales force through various strategies that include new hires, training and realignment.

Area of concern

Data sovereignty is one of the major challenges for Oracle Corporation (NYSE:ORCL) in signing international deals. However, the company is making efforts to overcome the challenge through building of data centers in global markets to ease its expansion internationally.

Outside the U.S., Oracle has data centers in Canada, Brazil, U.K., Germany, Amsterdam, Australia and Singapore. The company is also building data centers in China and will be looking to Japan in the next move. Oracle has plans to build more global data centers with some 6-9 new markets being considered.

In the short-term, adverse foreign exchange rates are expected to weigh down Oracle’s revenue growth.

Financial impact of cloud

Oracle Corporation (NYSE:ORCL) has done a great job in trying to hold the margins almost stable, despite huge investments in cloud. The company should, in the long-term, be able to grow its operating income faster after it completes its transition to cloud.

In the U.S., Oracle disclosed that SaaS revenue has already picked up and is significantly greater than revenue from the on-premise license for applications. Additionally, Oracle notes that Java is leading in the PaaS category in the U.S., a success that the company hopes to replicate in other markets it is entering or expanding. Oracle is expected to run different pricing for its different cloud offerings, expanding revenue opportunities.

Unlike most of its cloud competitors, Oracle is well-positioned to benefit from larger margins because of low-cost of data center assets, given that the company itself produces a lot of such assets.

Strategic deals

Mergers and acquisitions should enable Oracle Corporation (NYSE:ORCL) to accelerate improvement in its cloud profitability.

Oracle is among the companies that could potentially close a buyout deal with Salesforce. Given that Salesforce already uses Oracle’s database technology, integrating the asset will be easier for Oracle compared to other bidders.

If a deal is closed, Salesforce could add between $5 and $6 billion in cloud sales to Oracle. The other potential benefit for Oracle in the acquisition of Salesforce is that it will be able to expand its customer base, allowing it to sell more products to them.

Cheap borrowing

Oracle Corporation (NYSE:ORCL) has taken advantage of the low interest rates environment to raise debt, taking in about $10 billion through bond offerings. The move is particularly crucial given the ongoing cloud transition, which requires massive investment, including strategic acquisitions to support the cloud agenda.

Conclusion

Oracle Corporation (NYSE:ORCL)’s late entry to cloud should be among the least concerns among investors because the company has been able to prove its ability and potential to challenge even the market leaders. From an innovation perspective to financial resources, Oracle has what it takes to compete and win in the nascent and potentially lucrative cloud computing business.


 

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

 

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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