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Summary

  • The competition in the sector is getting intense with Salesforce.com and SAP AG fighting for more market share.
  • Oracle's aggressive strategy will help the company fight the competition in the sector.
  • Micros Systems acquisition will bring diversity to the products portfolio and the offering of the company.

Oracle (NYSE:ORCL) has been performing well in the software as a service (SAAS) segment during the last quarter - it achieved a 25% increase in revenue from this particular segment. However, the company continues to face fierce competition from its peers, particularly Salesforce.com (NYSE:CRM). In our previous articles, we have covered different aspects of the company, including the market share growth of the major players in the industry in North America and other parts of the world. In this article, we will look into the company's current performance in the sector and compare it with its peers. We will also look into the alternative growth tracks the company has should it take a hit from the growing competition.

A Look at the Competition

Oracle is at the third place with 10% global market share while Salesforce.com and SAP AG (NYSE:SAP) are ahead of it with market share of 16.1% and 13%, respectively according to Gartner. However, Oracle did post a solid increase in this segment in the previous quarter, which suggests that it may have managed to increase its market share in 2014. However, it is likely to face more intense competition this year based on the progress of its peers.

Let us start by looking into Salesforce.com. This company has been complementing its growth by strategic acquisitions for quite some time now. In 2013, Salesforce.com made a total of 5 acquisitions - during the first six months of the year Salesforce.com has made 3 new acquisitions, indicating that the trend will continue and the full year count of acquisitions might be higher than the last year. One of the most important buys for the company is ExactTarget - this $2.5 billion acquisition is intended to expand the company's cloud-based platform. Since Salesforce.com only provides SaaS based CRM, it means that its market share might further increase with the additional capacity. As a result, we might see an increase in competition from the market leader of CRM segment, which might affect Oracle's CRM growth.

On the other hand, SAP is also taking steps to increase its market share. The company last year acquired Hybris to increase its footprint in e-commerce, applications and master data management. In addition, it is also providing services related to content management, order management and product information management all of which are the fastest growing areas in this industry. Its revenues from CRM grew 13% in 2013 as compared to Oracle's revenue growth of 4%.

Counter Measures

To keep up with the competition, Oracle has also changed its strategy and the company is being aggressive. Oracle has a strong position in two segments: Software as a Service and Platform as a Service (NASDAQ:PAAS). Particularly in SaaS segment, the company plans to increase its bookings by over 50% this year. This should not come as a surprise since the company has hit a 25% growth in this segment in the first quarter of this year. Comparing it with the last quarter of 2013, where Oracle's CRM sales grew by only 4%, this is a remarkable increase. In addition, the company has added 870 new cloud customers in the first quarter of 2014. While in the customer experience service line, it has added 430 customers.

A Step in a Different Direction

Furthermore, in order to maintain and grow its position, Oracle is on its way to make a smart acquisition of MICROS Systems (NASDAQ:MCRS) for a total of around $5.3 billion. This move of the company is not in retaliation to the competition in CRM industry; it is a step in a different direction. MICROS Systems produces hardware and software for the hospitality and retail industry. It also deals in point of sale cash registers.

MICROS Systems is a fluently running business. Last quarter, it posted 11% year-over-year growth in revenue and further increased its guidance. Should the deal go through, this move of Oracle will benefit the company by mitigating its risk. An important thing to notice in the company's books is that SaaS and PaaS revenues only account for 3% of the company's total revenues. However, it did achieve the highest growth rate amongst all segments. With this new acquisition, the company will bring growth to Hardware systems segment as well. This segment currently accounts for 13% of the company's total revenues and saw a 4% decline in revenues in the last quarter. Things should turn around for Oracle in this segment after this deal and the company should be able to post stronger profits as it creates synergies with the new business. The following table shows the break-up of Oracles revenues by segments and their respective growths.

Source: SEC Filings

Conclusion

We believe Oracle is moving in the right direction. It has been quite aggressive in CRM segment recently, and if the company continues its aggressive growth strategy; it will not be difficult to achieve its full year guidance. Furthermore, the company is also making moves in other segments like Micros Systems acquisition, which will further enhance the product portfolio of the company and provide it diversity. The focus on diversification and high-growth areas will allow Oracle to grow its revenues and cash flows in the long-term.

Additional Disclosure: This article is for educational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.

Source: Oracle Is Making All The Right Moves