Oracle: Focus On Cloud, Hardware Showing Recovery

| About: Oracle Corporation (ORCL)

Oracle (NASDAQ:ORCL) is ramping up its cloud services with aggressive acquisitions of smaller players in the SaaS, market. In the last two years the company has acquired SaaS-based companies such as Taleo, RightNow, and Eloqua to adapt to changing IT spending, which is shifting from on-premise to cloud-based services. In line with its acquisition strategy, it will buy Responsys (NASDAQ:MKTG), a cloud marketing company, for $1.5 billion, paying $27 per share. The transaction is expected to be completed in the first half of 2014.

Responsys provides marketing SaaS solutions that help customers to create, manage, and improve marketing campaigns across e-mail, Web, social, and mobile channels. It has around 450 clients, including LinkedIn (NYSE:LNKD) and Nordstrom (NYSE:JWN), which will be added to Oracle's customer base. Oracle will integrate Responsys with Eloqua, which it acquired in December 2012, as part of the Oracle marketing cloud offering. Responsys's business to customers, or B2C, service will complement Eloqua's business to business, or B2B, services. This will enable Oracle to provide both B2B and B2C marketing-automation support to companies by giving them tools they need at one place. The enhanced marketing cloud will help Oracle attract chief marketing officers, or CMOs, to Oracle's services. This will, in turn, help Oracle increase revenues, as CMOs increase spending on digital marketing owing to increased use of digital media by customers.

The Responsys acquisition will also make Oracle competitive with (NYSE:CRM) in digital marketing. Last year, Salesforce acquired ExactTarget, a marketing cloud company, for $2.5 billion. The acquisition enhances Salesforce's marketing cloud offerings by providing marketing automation as well as email and mobile campaign capabilities. This has prompted companies such as Oracle to target the fast-growing cloud marketing. The global market for marketing automation is expected to reach $9.5 billion by 2017 from the current level of $4.4 billion. With its increased focus on cloud marketing services, Oracle will be able to gain a significant portion of this fast-growing market.

Hardware systems business at an inflection point

The company's hardware systems business is showing signs of improvement. The company posted revenue of $714 million for the second quarter ending in November for this business, a decrease of 3% compared to same quarter last year but the lowest revenue decline in the last nine quarters. Oracle had seen year-over-year revenue declines of more than 13% in the preceding quarters.

Source: Company results

This better performance in the hardware business is due to the company's engineered systems, which optimize data centre operations. Engineered systems form 30% of total hardware systems product revenue. Bookings for engineered systems grew by 34% compared to the same quarter last year. The company has nearly completed the transition in its hardware systems product business, moving away from loss-making commodity systems to high-margin engineered systems.

Oracle expects healthy growth in the sales of engineered systems in 2014. Hardware systems product revenue is expected to grow in the coming quarters as the sales of engineered systems increase. Global data centre spending is expected to increase by 2.6% in 2014 from negative growth of 0.3% in 2013. As spending on data centers increases in 2014, demand for Oracle's engineered systems will also increase.


Oracle has beaten market expectations in the last quarter, reporting revenue of $9.27 billion against the market expectation of $9.19 billion. This was due to lower-than-expected losses from its hardware business owing to better performance of engineered systems. The growth in engineered systems is expected to continue in the coming quarters. The consolidation in the company's hardware systems business will help the company stabilize its revenue stream.

On the cloud side, the Responsys acquisition will help the company consolidate its position in both B2C and B2B marketing automation and attract more CMOs, increasing cloud-business sales. Considering the turnaround in the company's hardware business and the growth prospects in the cloud business, I am bullish about the stock for 2014.

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.