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Oracle Corporation (ORCL), SAP AG (ADR) (SAP): Kicking the Competition’s SaaS

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Oracle Corporation (NASDAQ:ORCL) appears to be presenting investors with quite the buying opportunity, being down over 11% over the past month. The reason? Oracle’s fiscal fourth-quarter results came in below expectations, once again disappointing investors. But is the bad news overblown? Quite possibly.

Software-as-a-Service (SaaS) is all the rage these days. Adobe Systems Incorporated (NASDAQ:ADBE) is making the move, transitioning its services to the cloud, and Oracle Corporation (NASDAQ:ORCL) acquired a number of cloud companies in 2012, including RightNow for $1.5 billion and Taleo for $1.9 billion.

Oracle Corporation (NASDAQ:ORCL) is in the process of moving more of its revenue reliance over to the Software-as-a-Service (SaaS) business. Its cloud platform allows enterprises to shift data applications between the public and private cloud. This includes its newsiest release, Oracle Database 12c. Oracle Corporation (NASDAQ:ORCL) has already been offering Fusion SaaS applications for almost two years, but the 12c offering is targeting customers consolidating databases in their private cloud.

Oracle Corporation (NASDAQ:ORCL) has partnered with NetSuite Inc (NYSE:N), which offers cloud based enterprise resource management services. NetSuite Inc (NYSE:N) plans on integrating its services into Oracle’s cloud-based human resource software. The integration should be a big positive that can help clients reduce sales cycles.

Gartner believes that global spending on enterprise IT spending will reach $3.8 trillion in 2013. In particular, the research firm expects revenues from SaaS expected to grow from $14.5 billion in 2012 to $22.1 billion in 2015.

So why is Oracle down so much over the past few weeks?

License revenue growth last quarter was up only 2% year-over-year, at the very low end of its 1% to 11% expectations. This comes after weakness was greater than expected in Brazil. But on the positive front, hardware systems revenue was down only 12%, compared to the guidance of down 12% to 22%.

Oracle expects that hardware could see positive revenue growth in fiscal 1Q 2014. Meanwhile, SaaS related revenues were up 50% year over year. I believe the sell-off is overdone and the stock’s current trading range could be a solid buying opportunity.

Free cash flow for the quarter was an impressive $4.4 billion and cash on hand is at $32 billion. Meanwhile, debt was down over 6.5% to 18.5 billion. Oracle also took the opportunity to double its quarterly dividend to $0.12 per share, while authorizing an additional $12 billion in share buybacks.

SAP AG (ADR) (NYSE:SAP) is one of Oracle’s chief competitors and it also happens to be one of the largest independent software vendors in the world; generating over 80% of revenues from SaaS offerings.

SAP AG (ADR) (NYSE:SAP) and Oracle are the leaders in the enterprise resource planning market.

Both market leaders are continuing to make big pushes in the SaaS and cloud markets, which should help them fend of rising competition form smaller competitors. Analysts expect SAP AG (ADR) (NYSE:SAP) to grow license revenues by 9% in 2013 thanks to the increased adoption of enterprise software.

A couple of SAP AG (ADR) (NYSE:SAP)’s key drivers include the its in-memory database technology, HANA, which allows customers to run real-time database analysis. SAP also has plans to acquire Hybris, a Swiss-based enterprise commerce software company. This will help SAP AG (ADR) (NYSE:SAP) further break into the the the Customer Relationship Management sector.

Big Blue cloud

International Business Machines Corp. (NYSE:IBM), aka Big Blue, is an IT services, software, computer hardware and research super-firm. IBM’s global tech services accounts for over 55% of revenues and includes IT infrastructure, consulting, outsourcing and management services. The software segment accounts for 25% of revenues and focuses on operating systems software.

Revenues are expected to be flat in 2013 and then see modest 2.5% growth in 2014. International Business Machines Corp. (NYSE:IBM) hopes to drive margin growth with a renewed focus on higher-margin software and service revenue streams. Along those lines, IBM made a big splash earlier this year with its $2 billion acquisition of SoftLayer. The move will help IBM offer customers private cloud access, in addition to its public cloud.

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