Oracle’s (ORCL) path as a stable, diversified and perennially profitable tech titan is likely to continue to gain traction in future years. Thanks to founder and CEO Larry Ellison and a management team that has been committed to increasing its smorgasbord of offerings to companies and industries that increasingly prefers a “one stop shop” when it goes shopping for applications, hardware and data management software, Oracle has a steady path to earnings gains in years out.
Oracle’s staid predictability was not always a given, especially when you have a CEO as colorful, offbeat and prone to surprises as Larry Ellison. But for Oracle the surprises have mostly come in all the right places: predictions that mostly came true when it had the temerity to snap up competitors that fell on hard times and out of favor on Wall Street. In hindsight, Oracle’s strategy to pick up beleaguered competitors is sheer brilliance. Oracle was able to round out its portfolio and increase market share in key segments by snapping up PeopleSoft, Siebel, BEA Systems and most recently Sun Microsystems for effectively pennies on the dollar. In so doing, it has become a market leader in applications, systems software and hardware to round out its already dominant presence as undisputed leader in database technology. It is easy for critics in hindsight to say that Oracle’s acquisition strategy was the obvious path to diversification and stability, but acquisitions have a tendency to stub the toes of even the most disciplined companies. Mis-timed, mispriced and ultimately non-accretive to earnings acquisitions are often more the norm than the rule.
Oracle has distinguished itself in its wisdom of picking its spots in the acquisition game by being disciplined in both the timing and boldness of such moves. Arch rivals PeopleSoft and Siebel Systems were acquired after the collapse of the tech bust when sentiment was at an all time low. Sun Microsystems was acquired by Oracle after years of self-inflicted wounds and in the aftermath of the global financial crisis when most institutional investors were eager to find a way out. With the first two acquisitions, not only was Oracle able to gain market share in the ultra competitive corporate applications space, it was able to create a model for predictable cash flow by rolling new clients into maintenance support contracts. These contracts act as perpetual annuities and corporations typically pay approximately 15% each year for upgrades, technical support and maintenance. This predictable revenue stream acts as a stabilizing rudder when trying to tack the stormy seas of new software license revenue which can be unpredictable for most enterprise and consumer software companies.
The irony is that by scrambling to get even larger in its acquisition strategy, it has steadied the predictability of license revenue by being a “one stop shop” that is so compelling to corporate CIOs wary of venturing to the corporate software “bazaar." To say that Oracle has proved adept at this game is an understatement, especially when you look at all the enterprise software players that in their day gave Oracle a pretty good run for their money: PeopleSoft, Siebel, Informix, Sybase, Baan, I2, BEA Systems - the list goes on and on for enterprise players that have been merged out of existence or become irrelevant in the quest to grow big or diversified enough to become a true enterprise player.
Thanks to its acquisition of Sun Microsystems, Oracle now competes capably on more fronts than ever before. Oracle is taking its “one stop” to enterprise hardware and server markets, a domain that would have appeared unthinkable for Oracle years ago. But once again, Oracle appears to be pulling this off and it has been unabashed in its willingness to provoke very strong competitors in a pitched battle for hardware supremacy. Perhaps Oracle’s strategy is to render hardware less relevant while it recoups the profits by higher value added applications and systems software. Regardless of how the strategy plays out, by hiring former HP CEO Mark Hurd, Oracle essentially upped the ante in bringing the fight for hardware supremacy to the foreground. Apparently, this is the moxie it takes to maintain relevancy in an industry which shows signs of maturing only to be hit hard by wave after wave of innovation and structural change that can quickly upend the unsuspecting.
Tech bellwethers such as Microsoft (MSFT), Hewlett Packard (HPQ, Intel (INTC) and Cisco Systems (CSCO), while still relevant, have not been near as adept in having the ability to out flank competitors and having that sixth sense to see around corners. Even enterprise application king SAP (SAP) with its Teutonic efficiency and master of detail application architecture coveted by many clients, has not been able to trump the bold, strategic moves that Oracle has made in its quest to become one of the most compelling dance partners to corporate enterprise buyers. Its market cap stands at less than half of Oracle’s and it does not have newer frontiers of hardware, or the steadying presence of Oracle’s database supremacy to compete. Perhaps only IBM (IBM) has been as adept at navigating the enterprise computing landscape and it has done so through a vastly different strategy which I will review in in a separate article due to be published shortly.
Oracle now finds itself in the enviable position of facing a market with fewer truly capably diversified enterprise competitors vying for corporate dollars. With the advent of cloud computing and such players as Salesforce.com (CRM) taking hold, you can bet that the battle for enterprise computing dollars will shift in new and unexpected ways to this new frontier. Nevertheless, with Ellison and Presidents Safra Katz and Mark Hurd at the helm, expect Oracle to continue to adapt - and execute competently off those adaptations - in surprising ways as the borders of computing continue to morph. This could be a boon to Oracle’s shareholders who could easily get used to Oracle’s colorful plays resulting in boringly predictable earnings increases and their attendant ratcheting in Oracle's share price.
Brett Korsgaard is the founder and managing member of Koa Capital Management, an investment holding company which was established in 2002. Koa Capital Management maintains a venture capital portfolio in technology and the emerging clean tech sectors. Mr. Korsgaard is a graduate of UC Berkeley and has over 20 years experience both working for and investing in private and public companies in the tech sector.