Oracle (NYSE:ORCL) has announced the introduction of the Oracle Service Cloud to strengthen its Cross Channel Contact Center solution. The product is designed for the iPad and will enable Cisco's customers to have a connection while they are on-the-move. In this article, I want to demonstrate how the rise in the iPad sales and the growth in worldwide cloud traffic will enable Oracle to boost its software license updates and the product support revenues with the new solution. This development will enable Oracle to improve its price multiples.
How will this happen? As many organizations struggle to provide a quality service to customers, they increase their patronage of the private cloud services sector. According to Cisco, this will make the global cloud IP traffic to show a six-fold increase over the next five years. Simultaneously, Apple will sell $11 billion iPads to the corporate market in 2013 and $13 billion tablets in 2014. Since the new Oracle product is designed to strengthen the iPad and the private cloud service, Oracle will benefit from the increased sales by at least 1%. This will help Oracle to improve its revenues.
Oracle is well-positioned to increase its software license updates and the product support revenues. In the third quarter, its software license and the product support revenues were up 7% to $4.3 billion. In the second quarter, the new software licenses and the cloud software subscription revenues were up 17% to $2.4 billion. The software license updates and the product support revenues were up 7% to $4.3 billion. Without the impact of the U.S. dollar strengthening compared to the foreign currencies, the sector would have recorded an impressive 18% growth.
"New Software licenses and cloud software subscription revenues grew 18% in constant currency," said Oracle CFO, Safra Catz, in the second quarter report.
Oracle and Cloud Solution
Oracle has unveiled many strategies to strengthen its cloud division in the past. It purchased RightNow to enable it to have a cloud-based customer experience suite. It purchased Taleo for $1.9 billion to improve its software on the human resource sector. It also acquired Tekelec to further its cloud transition plans and have the access to its mobile software solutions.
Oracle needed to develop the product because one in seven of its customer service sessions arose from its mobile devices. Consequently, its agents needed the mobile application to be efficient when they attend to their customers. Fortunately, the company's product support solutions are driving its sales.
Looking at the division's revenue in the last financial reports of Oracle, we see that it showed a year-on-year growth. It would have grown to 18% in the second quarter with a constant currency. So it can be said that the software license updates and the product support division is efficiently run.
With a price to earnings ratio of 15.46, Oracle is trading competitively, given that its gross margin is 80.84%. The new product will increase the software updates and the product support revenues of Oracle, improve the company's price to sales ratio of 4.33, and ensure the second quarter decline of the new software license and the cloud subscription revenues does not reoccur.
With a price to earnings of 15.46, compared with 13.94 for IBM (NYSE:IBM) and 23.85 for SAP (NYSE:SAP), price to sales of 4.33, compared with 2.18 for IBM and 4.17 for SAP, Oracle is not doing badly. IBM and SAP are the rivals of Oracle and have been unveiling their own strategies for a cloud-based solution. Just after Oracle made its acquisition of RightNow, IBM purchased DemandTec to strengthen its software solutions. SAP then purchased SuccessFactors for its human relations Software-as-a-Service product portfolio. However, Oracle's new product will enable the company to compete with its rivals and deliver a quality cloud-based service and solution.
There are risks to buying Oracle stock. The company likes to acquire other companies, and there are some fear it will overreach and cause the stock to suffer a dip in the short term. Besides, the last earnings report did not satisfy many investors. But looking at the quality of the Oracle new product and the revenue prospects coming from the increased iPad sales and the rising global cloud traffic, we can say Oracle will increase its revenues. Looking at the company's price multiples, we still say investors should buy Oracle for the long term.
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.