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A Good Omen From Oracle
The bigger a business gets, the more complicated it becomes. The more complicated a business becomes, the larger its IT needs get. That is my five-second summary on Oracle's (Nasdaq: ORCL) basic raison d'etre and why I continue to be optimistic about the company's future.
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The Quarter That Was
Oracle generally has a reputation for delivering the goods, and this quarter was no exception. Although revenue was in line with the average analyst guess, 39% growth to about $9.5 billion was a solid result. Even stripping out the non-organic boost from the acquisition of Sun, 12% growth was a solid result. Oracle also delivered very solid operating performance and beat the bottom-line estimate (adjusted for items) by more than 10%. (For related reading, take a look at The Wonderful World Of Mergers.)
Digging in, new license growth was a solid 14%, above the high end of the company's prior guidance of 3-13%. I do not think that anybody should mistake this for the inherent growth rate of the market right now. Rather, I think the company benefited from pent-up demand as companies are cautiously emerging from their recession bunkers and spending again.
The Sun And The Cloud
I have to admit that I was originally scratching my head when Oracle bought Sun. After all, why would the company want to compete in hardware with the likes of IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ)? As I have thought about it since, it makes more sense. Not only is Java valuable, but a large percentage of Oracle's software runs on Solaris Sparc. Moreover, Sun was once a good growth company and perhaps Oracle will reignite that, especially since Sun outsourced its manufacturing and does not carry that burden.
If nothing else, I also think the deal served to significantly irritate and inconvenience many of Oracle's rivals, and I get the feeling that Oracle honcho Larry Ellison smiles a bit about that. IBM now has to deal with a high-quality rival that can integrate hardware and software. Cisco (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT) have another headache, and perhaps this pushed Sybase (NYSE: SY) into the arms of SAP (NYSE: SAP) as both stood to suffer. To this point, consider the fact that Oracle directly called out SAP in its earnings announcement, boasting about the business it's taking away from the company, only to see SAP fire back shortly thereafter.
Oracle's Future
Longer term, though, Oracle is certainly looking toward cloud computing as a part of its future. That is probably not great news for the likes of Salesforce.com (NYSE: CRM), unless Oracle wants to buy it, too. But that could have repercussions across the board. Do companies like BMC Software (Nasdaq: BMC), Informatica (Nasdaq: INFA), Red Hat (NYSE: RHT), VMWare (NYSE: VMW) and Citrix (Nasdaq: CTXS) all get thrown into play as even larger companies look to assemble the pieces they need to compete? One way or another, Oracle's ongoing strength is likely to keep the game of "mix, match and merge" alive and kicking for the next few years.
The Bottom Line
I like disruptive companies. Actually, let me rephrase that - I love disruptive companies. For a company of Oracle's size and age to still be an instigator and problem-causer is quite unusual and says a lot about a dynamic corporate culture. Even though Bill Gates won the supposed personal rivalry with Ellison years ago, Oracle still stands as a driver in its industry, while some wonder if Microsoft has another round of relevancy left in it.
I am also a big fan of Oracle's stock. A couple of quality business software enterprises are a little cheaper, but I like the added boost that Oracle's market position and leadership give to the thesis. To be more explicit, unless your larger concerns about the market or technology stocks have you on the sidelines altogether, I think you can buy Oracle today and wind up very happy with the move.
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The Quarter That Was
Oracle generally has a reputation for delivering the goods, and this quarter was no exception. Although revenue was in line with the average analyst guess, 39% growth to about $9.5 billion was a solid result. Even stripping out the non-organic boost from the acquisition of Sun, 12% growth was a solid result. Oracle also delivered very solid operating performance and beat the bottom-line estimate (adjusted for items) by more than 10%. (For related reading, take a look at The Wonderful World Of Mergers.)
Digging in, new license growth was a solid 14%, above the high end of the company's prior guidance of 3-13%. I do not think that anybody should mistake this for the inherent growth rate of the market right now. Rather, I think the company benefited from pent-up demand as companies are cautiously emerging from their recession bunkers and spending again.
The Sun And The Cloud
I have to admit that I was originally scratching my head when Oracle bought Sun. After all, why would the company want to compete in hardware with the likes of IBM (NYSE: IBM) and Hewlett-Packard (NYSE: HPQ)? As I have thought about it since, it makes more sense. Not only is Java valuable, but a large percentage of Oracle's software runs on Solaris Sparc. Moreover, Sun was once a good growth company and perhaps Oracle will reignite that, especially since Sun outsourced its manufacturing and does not carry that burden.
If nothing else, I also think the deal served to significantly irritate and inconvenience many of Oracle's rivals, and I get the feeling that Oracle honcho Larry Ellison smiles a bit about that. IBM now has to deal with a high-quality rival that can integrate hardware and software. Cisco (Nasdaq: CSCO) and Microsoft (Nasdaq: MSFT) have another headache, and perhaps this pushed Sybase (NYSE: SY) into the arms of SAP (NYSE: SAP) as both stood to suffer. To this point, consider the fact that Oracle directly called out SAP in its earnings announcement, boasting about the business it's taking away from the company, only to see SAP fire back shortly thereafter.
Longer term, though, Oracle is certainly looking toward cloud computing as a part of its future. That is probably not great news for the likes of Salesforce.com (NYSE: CRM), unless Oracle wants to buy it, too. But that could have repercussions across the board. Do companies like BMC Software (Nasdaq: BMC), Informatica (Nasdaq: INFA), Red Hat (NYSE: RHT), VMWare (NYSE: VMW) and Citrix (Nasdaq: CTXS) all get thrown into play as even larger companies look to assemble the pieces they need to compete? One way or another, Oracle's ongoing strength is likely to keep the game of "mix, match and merge" alive and kicking for the next few years.
The Bottom Line
I like disruptive companies. Actually, let me rephrase that - I love disruptive companies. For a company of Oracle's size and age to still be an instigator and problem-causer is quite unusual and says a lot about a dynamic corporate culture. Even though Bill Gates won the supposed personal rivalry with Ellison years ago, Oracle still stands as a driver in its industry, while some wonder if Microsoft has another round of relevancy left in it.
I am also a big fan of Oracle's stock. A couple of quality business software enterprises are a little cheaper, but I like the added boost that Oracle's market position and leadership give to the thesis. To be more explicit, unless your larger concerns about the market or technology stocks have you on the sidelines altogether, I think you can buy Oracle today and wind up very happy with the move.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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