Oracle Buys BigMachines To Win The Cloud Battle: Will Transaction Improve Margins?

Oct.25.13 | About: Oracle Corporation (ORCL)

Oracle's (NYSE:ORCL) Chief Executive Officer, Larry Ellison, announced mid last year the intention of the tech company to join the cloud battle. Oracle has since made cloud computing as a core part of its business strategy and acquisitions of some businesses that could help the company maintain economic moat in the cloud business were not left out. In addition, Oracle has successfully struck important working relationships with Microsoft (MSFT) and salesforce.com to push further into the cloud with its database 12c. The latest acquisition which is being processed by Oracle in line with its plan to grow more earnings from cloud computing is the impending purchase of BigMachines for an undisclosed amount but a source close to the deal claimed it was worth between $400 & $500 million. BigMachines is a Chicago-based company best known for its expertise in cloud-based CPQ solutions (That is, configure, price and quote cloud computing solutions) to complement Oracle's CRM offering. Oracle will accelerate its selling efforts in the cloud with BigMachines if the proposed transaction gets the relevant regulatory approval.

How BigMachines Might Be a Game Changer for Oracle

As usual with the previous acquisitions by CEO Larry Ellison, Oracle will only acquire a business that will increase its economic moat. With BigMachines, Oracle will jump start its cloud solutions and reach the over 300 existing enterprise customers of BigMachines which includes HP, GE, and Symantec among other big companies on the list of existing customers of BigMachines. Oracle is out to offer improved cloud solutions to its customers via BigMachines in a way that will help them to sell smarter. According to Oracle, the proposed acquisition will enable the company to acquire the technology for end-to-end ''smarter selling'' cloud solution. BigMachines' CPQ solutions and Oracle's CRM offerings will together bring help to sales personnel to improve sales production and enhance customer satisfaction while also helping businesses to be more profitable. According to Thomas Kurian, executive vice president of Oracle Development, "The fundamental goals of smarter selling are to provide sales teams with the information, access, and insights they need to maximize revenue opportunities and execute on all phases of the sales cycle,"

Thomas said further that "By adding BigMachines' CPQ Cloud to the Oracle Cloud, companies will be able to drive more revenue and increase customer satisfaction with a seamlessly integrated process across marketing and sales, pricing and quoting, and fulfillment and service."

Also, with the purchase of BigMachines, Oracle will be able to gain access to a whole lot of customers of Salesforce.com via BigMachines Express which is integrated into App Exchange, the software cloud of Salesforce.com.

Oracle's Future Outlook and Valuation Metrics

A recent report shows that the future of cloud computing is very bright with global cloud computing market estimated to grow by about 36% annually to $19.5 billion in the next three years. If anyone is wondering why Oracle has been investing heavily into this line of business, it is because the company want to create an economic moat for itself in the cloud space. Late last year, Oracle bought Eloqua, a big competitor of Salesforce.com for the sum of $871 million. With the purchase, Oracle now has access to many customers of Salesforce.com. Another killer acquisition made by Oracle towards creating a moat in the cloud space was sealed last week with the purchase of Compendium, a startup company that manages corporate marketing blogs and has notable customers like Cvent, Bass Pro Shop and Gymborie among others.

Oracle's first quarter revenues of $8.4 billion missed analysts' estimate of $8.48 billion narrowly though the company reported a 2% growth in comparison with its first quarter revenue for 2012 fiscal year. Oracle's earnings per share (NYSEARCA:EPS) of $0.59 for the quarter exceeded analysts' estimate of $0.56. Revenues from software licenses and subscriptionsfor cloud software rose 5% to $1.7 billion. Revenues from product support and Software license updates increased by 7% to $4.4 billion. Sales from hardware systems products came in flat at $669 million for the quarter.

Oracle's business model is rather unique with a lot of moat. Revenue from its software generated $27.5 billion out of $37.2 billion total revenues reported by the company last fiscal year. Software updates alone generated $17 billion of the $27.5 billion while the remaining amount was generated from subscriptions and new licenses. The good thing about Oracle's software business is that about 95% of its customers readily sign up for renewal of their licenses or for updates.

One thing is that Oracle is set to win the cloud battle with the series of strategic acquisitions it has been making within the cloud space. For Oracle investors who demonstrate a lot of patience, winning with Oracle is sure because the stock has the potential for upside growth that could be up to $40 per share as its cloud services begin to yield above average returns and higher margins.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.