Oracle Corporation (NASDAQ:ORCL) is engaged in the business of enterprise software, computer hardware and services. It develops, manufacturers, sells, hosts and supports database and middleware software and applications software. The company’s hardware offerings are primarily made up of computer servers and storage products.
Let’s understand the business prospects of Oracle Corporation (NASDAQ:ORCL) through analyzing the key trends and sources of value.
High database market share
Oracle Corporation (NASDAQ:ORCL) began as a company focused on relational databases and despite its expansion into middleware software, application software, and even server/storage hardware through its acquisition of Sun Microsystems, Oracle remains the market share leader in database software. As per the latest Gartner 2012 Worldwide RDBMS Market Share Report, Oracle has a 48.3% revenue share, trailed primarily by IBM and Microsoft.
According to IDC, Microsoft Corporation (NASDAQ:MSFT), IBM, Oracle Corporation (NASDAQ:ORCL), SAP AG (ADR) (NYSE:SAP), and Symantec were the top five software vendors in 2012 based on revenue. SAP’s revenue grew the most at 5.1% followed by Oracle at 3.9%. The other three vendors also saw revenue grow, but slower than the overall market.
I expect Oracle Corporation (NASDAQ:ORCL) to maintain its position in the Database Market, and its cloud-based database offering to help it capture market share in the on-demand segment. However, due to increasing competition in the space from SAP AG (ADR) (NYSE:SAP), Microsoft Corporation (NASDAQ:MSFT) and others, it may not be able to capture more market share, and may even lose some.
New application software license
Oracle has managed to grow its Application software business steadily in the past. Its revenues from application software was nearly $4.0 billion in 2013. It recently launched , to make its application software available as an on-demand, cloud-based offering. However, due to increasing competition in ERP, CRM and other segments from other enterprise software giants like SAP, IBM and Salesforce.com, Oracle may not be able to increase revenue from this segment if Fusion Apps fails to gain traction.
Software license renewals by existing Oracle Database, middleware and application customers are a crucial part of Oracle’s value. Oracle customers are primarily medium-to-large businesses, including most companies in the Fortune 1000. The IT departments of these companies invest significant resources in optimizing their Oracle software and many IT staff becomes highly proficient in Oracle software through usage and formal certification programs. These client investments in Oracle create “sticky” customers which is evidenced by software license renewal rates of 95%.
In addition to high software renewal rates, Oracle benefits from high gross profit margins on license renewals and support fees associated with new license sales, making Software Renewals & Support Fees Oracle’s most profitable business, whereas SAP is utilizing the low fee tactics to gain on sale, which will in effect curtail its margins from this segment.
Oracle released Fusion Apps, a complete suite of ERP and CRM applications, in October 2011. With Fusion Apps, Oracle aims to offer a complete suite of resource planning, customer relationship management, human capital management, supply chain management, project planning and financial software to enterprise customers. It could help Oracle gain additional share in those markets where it competes with SAP and Microsoft.
Expenses and profitability
Oracle’s selling, advertising and administrative expenses (SG&A) was 22% in 2013. Given the increasing competition in the enterprise software market with a lot of other deep-pocketed enterprise giants, it may have to spend much more to push its products to enterprise customers. It may also have to ramp up its operational expenses if it wants to expand at a faster pace. If its SG&A expenses as a percentage of revenues increase, there could be a downside pressure on the stock’s price.
Profit margins show the ability of the company to generate profit from its revenue base. Instead of Gross Profit Margin, investors should also study the trend and figure of Earning before Tax Margin to understand the various expense drivers of its business. By analyzing the 5 year trend of Gross Profit Margin and Earning before Tax Margin (EBT), the company’s trailing 12 months EBT has showed improvement from 2012. Improvement in EBT reveals improvement in company’s operating efficiency. See 5 year trend in the chart below.