Oracle's Strategy Will Take It Higher Soon

Mar. 3.14 | About: Oracle Corporation (ORCL)

Oracle (NASDAQ:ORCL) is reaching new heights as the company continues on the path to expansion. During the last year, Oracle acquired 8 companies in different segments of its business. Oracle is following a strategy based on acquisitions in order to offer a complete package of services to its customers, which I believe will go a long way in ensuring the long-term growth of the company. At the moment, Oracle is in the process of acquiring Marketing Tech, BlueKai. In my opinion, Oracle's strategy to expand its business segment will bring in substantial growth opportunities and the business show considerable progress over the next twelve months. Let's look at the most recent acquisition and what it will bring to the company.

BlueKai: What will this Bring to the Company?

BlueKai offers data management platform to the marketing firms and allows them to assess consumer preferences. It is basically a cloud service which allows marketers to learn about consumers' interests as they browse through the web. For the internet based advertisement firms, this software is a huge asset as it allows them to focus their advertisements on their target market. As a result, more of the viewers respond to the advertisements as the software allows the marketers and advertisers to develop content that is according to the preferences of the customers.

As of 2013, BlueKai had $64 million in annual revenues while Oracle is rumored to be paying close to $400 million for the business - the price to sales multiple at 6.25 looks a little expensive compared to the industry average multiple of 4.9 - however, the long-term growth potential of the business should justify the price. BlueKai runs the world's largest third party data marketplace for its customers and has more than 700 million profiles. Furthermore, about 300 customers rely on BlueKai to maximize their marketing efforts. Considering the potential of BlueKai, I would say this is a reasonable deal. The company expects to use it both with Eloqua for automation of B2B marketing, and with Responsys, for automation of B2C marketing. In early 2013, the company purchased Eloqua for $871 million. But more importantly, it is remarkable how the company is linking these acquisitions which will lead to better synergies.

Moreover, the digital marketing is changing its winds with power going towards chief marketing officers from chief information officers. This is happening due to platforms like BlueKai. Oracle's is focusing on growing through acquisitions rather than organic as developing its own technology can take time and the opportunity may slip. Thus, it is acquiring the companies which already have the consumer base to dominate the market.

Focus on the Cloud

Cloud service is an important asset to Oracle responsible for bringing in over $1 billion dollars of annual revenue. This is equal to 11% of the software licensing and subscription revenues and the segment showed growth of about 1% during the last quarter. However, the company has managed to achieve this level in only three years which is remarkable. The company looks to be making acquisitions in the cloud and SaaS segment, which shows that Oracle sees a lot of potential in this segment.

Oracle is in competition with niche cloud service providers which include Salesforce (NYSE:CRM), Veeva (NYSE:VEEV) and Workday (NYSE:WDAY). These firms are giving a tough time to Oracle with its on-premises application business. Oracle's guidance grew considerably for its third quarter for new license sales and subscription revenue, which shows that the company is confident about fending off the competition. However, the share of the on-premises applications business is changing in the total revenues of the company, and now accounts for 17% of total license and subscription revenues, as compared to 23% in the prior year. This will be balanced out to some extent by the steady growth in database business and the robust growth of Cloud revenues. However, the decline in the upcoming on-premises application license revenues will likely put pressure on the company as the maintenance fees for on-premises rise.

Conclusion

Where BlueKai presents growth opportunities for the company, the on-premises application licensing puts pressure on it for now. However, this pressure is temporary and given the company's strategy so far, it will be able to overcome it. Further, BlueKai has a lot to offer to Oracle in the coming years. It presents the opportunity to become the key ingredient in the effectiveness of digital marketing, which itself is growing. Moreover, as these projects start to integrate, the product mix will enhance revenues substantially. Despite the recent increase in the stock price, my opinion is that the stock will grow further this year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. IAEResearch is not a registered investment advisor or broker/dealer. This article was written by an analyst at IAEResearch and represents his/her personal opinion about the companies mentioned in the article. The article is for informational purposes only and it should not be taken as an investment advice. Investors are encouraged to conduct their own due diligence before making an investment decision. I am not receiving any compensation (other than from Seeking Alpha) for this article, and have no relationship with the companies mentioned in the article.