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Oracle Continues Shift Toward On-Demand Software

Posted on Wednesday, Jun 24th 2009

Yesterday, Oracle (NASDAQ:ORCL) reported fourth quarter results that beat estimates. A highlight of the earnings call was CEO Larry Ellison admitting that Oracle is getting “a little bit” into the cloud computing space. More than a year ago, he was not so keen on investing in the SaaS sector due to the high cost of sales and cost of implementation. Let’s take a closer look.

In my most recent post on Oracle, I observed that the company is focusing more on SaaS and cloud computing offerings. Last quarter, it released Oracle Sourcing On Demand for efficient supply chain management and now its Fusion applications, to be announced later in the year, will be on-demand ready. Ellison also pointed out to a gap in the market that its biggest rival in the SaaS space, Salesforce.com, doesn’t address — software hosted and stored at a data center owned by a customer but run by the software company.

Oracle’s on-demand business is now worth about three quarters of a billion dollars, while the leading on-demand company, Salesforce.com’s annual revenue was $1.077 billion. Ellison also said in the call that Oracle’s goal is to be the number one on-premise application company and the number one on-demand application company.

Let’s now look at Oracle’s financials. Q4 revenue was down 5% to $6.9 billion and net income was down 7% to $1.9 billion. Adjusted earnings were $2.3 billion or $0.46 per share. Analysts expected earnings of $0.44 on revenue of $6.47 billion.

By segment, software revenue was down 3% to $5.8 billion with new software license revenues down 13% to $2.7 billion and software license updates and product support revenue up 7% to $3.1 billion. Services revenue was $1.1 billion, down 16%. Technology new license revenue was down 10% to $1.9 billion. BEA products, integrated with Oracle’s Fusion Middleware, accounted for $201 million of new license revenues. Applications new license revenue was down 19% to $805 million.

For the full fiscal year, revenue was up 4% to $23.3 billion and net income was up 1% to $5.6 billion. New software license revenue was down 5% to $7.1 billion and software license updates and product support revenue was up 14% to $11.8 billion.

Turning to the balance sheet, Oracle has $12.6 billion in cash and investments. During the quarter, it repurchased 14 million shares for a total of $250 million. For the full year, it repurchased 226 million shares for a total of nearly $4 billion. After the Sun acquisition in April, Oracle acquired Virtual Iron, a provider of server virtualization management software. SAP recently announced a $7 billion budget for acquisitions, perhaps in response to Oracle’s successful strategy of gaining market share.

For the first quarter, Oracle expects total non-GAAP revenue to range from zero to 2% in constant currency and negative 5% to negative 3% at current exchange rates. Non-GAAP EPS is expected to be between $0.31 to $0.33 in constant currency and from $0.29 to $0.31 at current exchange rates. GAAP EPS is expected to be between $0.23 to $0.24 in constant currency and $0.21 to $0.22 at current exchange rates.

The stock is currently trading around $21 with market cap of about $106 billion. It hit a 52-week low of $14.14 on March 6.

Chart for Oracle Corp. (ORCL)

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Although Larry Ellison went back on his word after he denounced cloud computing and its viability to make a profit from it, the current state of the economy and the competitive landscape makes the time right to enter the space. Revenue, earnings, software, and services revenue were all down. Companies will not be committing to new technology projects at least until the end of 2009. Ellison may smell blood, using the announcement to go after a competitor like a salesforce.com. It is just sound strategy. The part you mentioned that I think is most intriguing is SAP’s announcement of a $7 billion budget for acquisitions. Who might they go after?

Jordan Cole Wednesday, June 24, 2009 at 4:00 PM PT

I have covered SAP’s acquisition prospects extensively, Jordan. Pls check the prior posts on SAP and SaaS.

Sramana Mitra Thursday, June 25, 2009 at 8:57 AM PT

[…] their legacy.     So who is right?  It’s tough to argue with the success of Oracle and Microsoft to date.  Whether they are just packaging their old applications as SaaS or they […]

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