How Oracle Remains A Relatively Unknown Software Giant

By Greg McFarlane AAA

Among the world’s largest corporations by market capitalization, few are as unfamiliar to the everyday consumer as Redwood City, Calif.’s Oracle Corp. (ORCL). You can go months – if not a lifetime – without ever knowingly encountering Oracle or its products, yet the company is the second-largest software concern in the world. What makes Oracle different is that its customers are almost exclusively institutional. While the largest software company in the world, Redmond, Wash.-based Microsoft Corp. (MSFT), has tens of millions of customers, Oracle gets by with only 400,000. Furthermore, that customer base is so concentrated that Oracle serves as a textbook example of the Pareto principle. According to the company’s president, 60% of its revenue derives from a mere 0.5% of its clientele.

A Flagship Product You've Never Hear Of

The company’s flagship product, its Windows, its Budweiser, is Oracle RDBMS (it stands for “relational database management system”), which is currently on version 12C. Known colloquially as Oracle Database, the software lets customers build and manage their own databases, and consolidate several databases quickly. Oracle Database isn’t literally the only product in its class, but it’s close. Few of its competitors (e.g. SQL Server, DB2) are as versatile, as reliable, or as secure. Oracle knows this, and prices things accordingly. Licenses for Oracle Database are charged by the processor, and a single processor license for the enterprise edition runs $47,500. And chances are excellent that if you’re an Oracle customer, you’ll be running at least eight processors.

Oracle’s revenue numbers have remained titanic if static for the last several years, reaching $37 billion in 2012 and gaining 0.16% the following year. The bulk of that revenue – historically about two-thirds of it – comes from software licenses.

Oracle operates on the sound business strategy of selling customers the same thing multiple times. It licenses its software, makes money on that, then makes even more on maintenance and upgrades (to say nothing of selling support for its signature product line, and offering multi-year consulting, too).

Not Just Software

Oracle’s second revenue center is hardware, and much like with the company’s software operations (and with every car dealership in the world), Oracle profits from the add-ons. The company sold $3 billion worth of hardware systems in the most recent fiscal year, something of a decline from previous years. However, for every dollar of hardware systems Oracle sells, it sells another $2.20 in systems support and services. You can’t buy the pool without the diving board, the Jacuzzi, the safety ramp and the weekly maintenance contract. Oh, and the pH-balancing chemicals are extra.

From an accounting standpoint, Oracle’s asset ratio is robust. Decades of strong profitability (and growth, which has recently tailed off) mean that the company has little need to borrow money. Operations are just that lucrative. Oracle has also built up a comfortable cash reserve in the neighborhood of $15 billion, enabling it to pay out a consistent dividend over the years. You don’t need to even consider the consumer market when your ambition is to become the largest business software company in the world, and Oracle hasn’t. Instead, it’s made its fortune (and made founder and CEO Larry Ellison one of the richest men in the world) by catering to some of the most demanding and well-heeled institutions in the world.

So which deep-pocketed customers are Oracle’s largest? Most of the roster of Fortune 500 companies, to be sure, but who else? Well, think of organizations that have

·      millions of people and their respective data to keep track of

·      plenty of money on hand

·      little incentive to economize.

If you answered “governments,” go to the front of the line. Oracle customizes its databases for governments around the world, particularly federal governments, and particularly the U.S. federal government. In fact, the company's name stems from a Central Intelligence Agency project that its founders had worked on. Oracle’s first database customer was a United States Air Force base, and its subsequent customers include everything from state agencies to municipalities. It therefore stands to reason that Oracle’s co-founder and chief executive officer doesn’t even bother paying lip service to the popular idea that the federal government has overstepped the boundaries of privacy in its relentless collection of more and more personal data. Ellison dismisses that notion, saying that the National Security Agency’s domestic spying programs are “absolutely essential.”

The Bottom Line

Some companies’ influence is palpable, and visible in your daily life – the supermarket chain whose stores you visit, the car manufacturer whose latest model sits in your garage. Other companies are seemingly more discreet, but far more influential and wealthier. Oracle might not be top-of-mind in most households, but its 29% profit margins and long dividend history make it a favorite topic (and holding) among savvy investors.

 

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