Oracle's Cloud Acquisitions Increase Long-Term Potential

| About: Oracle Corporation (ORCL)

Oracle (NASDAQ:ORCL) develops, manufactures, markets, hosts, and supports database and middleware software, applications software, and hardware systems. Oracle's headquarters is in Redwood City, California. The company has a market cap of $152 billion, and its stock price is around $32.

Oracle, which once concentrated on application software, is now devoting its resources to the public cloud. On October 1st, Oracle co-founders and CEO Larry Ellison gushed about the company's advancements in the public cloud. During the conference, Mr. Ellison who once dismissed cloud computing as "gibberish" announced three new features for its cloud service at a customer conference in San Francisco. During the conference Mr. Ellison said, "We think we are ideally positioned with database software, and middleware and applications all in the cloud". Mr. Ellison also touted Oracle's Exadata X3 database machine and said "Customers will save so much money on storage that it will pay for that Exadata X3 over and over again". Recent upgrades to the Exadata X3 were also mentioned because Oracle is now moving from providing only Software-as-a-Service (SaaS) to providing a full cloud Infrastructure-as-a-Service (IaaS) and the IaaS will be powered by the Exadata X3 database machine.

Oracle debuted its cloud service in the summer of 2011. The service offered applications for sales management as well as its database platform on which clients could build websites and handle transactions. With the addition of the new cloud features, Oracles clients can now subscribe to computer servers, as well as storage and networking. Now that Oracle is expanding its cloud features it will be in competition with more experienced public cloud companies such as Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG).

In its foray into the cloud computing business Oracle has acquired a number of smaller technology companies. In 2012, Oracle has acquired eight businesses that should help it beef up its social friendly marketing credentials. The purchases included:

  1. SelectMinds on September 17th which is a Cloud-based social talent and corporate management application company.
  2. Xsigo Systems on July 30, 2012, which is a provider of virtualization technology that simplifies cloud infrastructure and operations.
  3. Vitrue on May 23, 2012, which is a Social marketing platform provider.
  4. Taleo on February 9th, for $1.9 billion; Taleo is a talent management software company.

With the purchases of these companies, Oracle has put together a "powerful suite of social friendly marketing tools" that will put it in direct competition with Salesforce (NYSE:CRM). During the company's user conference Mr. Ellison made it clear that Oracle was competing against when he said, "customers can use Oracle's software on Oracle's public cloud service, or on their own internal networks." This statement was an unmistakable shot at whose software runs only on the public cloud.

Recent Oracle News

On September 1st Oracle announced an upgrade for its Exadata database line. The upgrade combines an in-memory database with superior hardware. Larry Ellison boasted of Exadata's huge performance gains.

On September 1st it was announced that Nokia (NYSE:NOK) has reached a deal with Oracle to have its mapping and location services integrated with Oracle's business apps and data. Similar deals could be on the way, as corporate apps become more consumer-oriented and migrate to mobile devices.

On September 2nd in an interview with CNBC Larry Ellison said that Oracle was not planning to purchase any large companies such as NetApp (NASDAQ:NTAP) in the near future. Oracle has purchased 17 companies in the last two years, and has been quite willing to make big acquisitions in the past. Mr. Ellison did say that Oracle would be open to making a major acquisition a "couple of years down the road."

On September 20th during the first quarter earnings call Oracle's President and director Mark Hurd touted the company's new cloud clients. The new client list included big name companies:

  1. Cisco
  2. Colgate-Palmolive
  3. Cox Communications
  4. Kraft Foods
  5. Macy's
  6. Proctor & Gamble
  7. Direct TV.

On September 30th rumors came out that Larry Ellison is due to unveil 12c, the first new version of Oracle's flagship database platform in five years, at the company's OpenWorld conference, which will open on October 1st. The upgrade of the 12c database platform fits into Oracle's plan to grow its cloud computing business.


Oracle's future growth depends to a large degree on how well their public cloud products are received. In the October 1st customer conference, Oracle executives bragged about the company's new Cloud offerings. They touted the Exadata X3 database machine as well as the newly released Exalogic Elastic Cloud system. Unfortunately, for Oracle the sales for these systems have been weak, and its year-over-year hardware revenues were down by 24%. Oracle reported first quarter earnings on September 20th, and the good news regarding Oracle's cloud business is that revenues from the business approached a $1 billion run rate. Oracle's overall earnings were mixed with year-over-year revenues down by 2%, and net income up by 10%. In addition, Oracle's free cash flow was a sensational $5.1 billion and the company was able to repurchase over $3 billion of its shares.

Oracle has made a big bet, and has spent a ton of money since its decision to enter the cloud computing business. If the company can successfully compete in the cloud computing business, the stocks' long term potential is very good. In the first quarter earnings call, we learned that the company's first quarter revenues were down, and it predicted that its second quarter revenues would be flat. This leads me to believe that while the stock's long term potential may be good, its near term growth potential is limited.

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.

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