Oracle (NYSE:ORCL) may realize organic growth and capital appreciation for the long term if it focuses on strengthening its niche with retail and financial enterprises. Its recent earnings release showed marginal increases in software revenue and noteworthy declines in hardware revenue. Oracle has positive projections for growth in fiscal year 2013, but focusing on cloud IT services means it will face staunch competition throughout the long term. Firms already providing cloud services for enterprises are better positioned in their respective niches and have lower stock prices than Oracle. Oracle recently made several key acquisitions and product launches to bolster its penetration in the cloud IT industry.
Oracle recently unveiled Mobile Point-of-Service as a compliment to its Retail Stores Solutions. Mobile POS helps retailers streamline operations and reduce costs while simplifying the checkout process. The Mobile POS supports different types of OS and is becoming a growing interest amongst retail enterprises. Oracle also recently unveiled its new Oracle Banking Platform, a suite of multiple applications that large banks can use to transition from legacy systems. This platform is a compliment to FLEXCUBE and makes the transition easier, improves time-to-market and reduces costs for banks as well.
Aside from these complimenting suites, the Oracle Enterprise Manager was recently unveiled as well. This management platform provides solutions for managing and deploying enterprise applications in a private cloud and is effective in hardware-software management. This management IT service enables enterprises to set up and monitor a Java PaaS. This platform increases efficiency and reduces challenges for management in IT implementation. Oracle will also be meeting with several utility executives at the end of September in order to discuss challenges and opportunities where cloud applications can improve internal operations.
Oracle recently announced its agreement to acquire SelectMinds for its social talent sourcing in order to create a recruiting application based on social networking. Oracle has many products and applications that seem appealing now; the real test will be after the Windows 8 release when Microsoft begins to focus on bolstering its enterprise market share.
A recent press release detailed Oracle's first-quarter performance for fiscal year 2013. Total revenue increased 2% YOY to $8.2 billion. Oracle's total operating expenses accounted for 65% of total revenue, operating income was 35% and net income accounted for 25% of total revenue. First-quarter net income totaled $2 billion, increasing 11%, YOY. Operating income totaled $2.9 billion, increasing 7%, YOY. Operating cash flow for the trailing 12 months totaled $14 billion, increasing 9%, YOY.
Software licenses updates and product support revenue totaled $4.1 billion, increasing 3%, YOY. Oracle's new software licenses and cloud software subscriptions revenue totaled $1.6 billion increasing 5%, YOY. Software licenses updates and product support account for 51% revenue while software revenue accounted for 70% of total revenue. Oracle's hardware systems product revenue totaled $779 million, decreasing 24%, YOY. Hardware systems accounted for 16% total revenue and services revenue accounted for 14% total revenue.
Oracle's engineered systems that include Exadata, Exalytics and Exalogic exceeded 100% growth in the first fiscal quarter 2013. Oracle projected it will double these sells and exceed $1 billion while its cloud division is currently growing toward $1 billion in revenue on an annual basis. Management feels these will be the two main catalysts driving long-term growth looking forward. Oracle will be unveiling several IaaS, SaaS and PaaS applications in the near future to bolster its portfolio of cloud services for enterprises.
Oracle will be competing with firms that provide cloud IaaS like Cisco (NASDAQ:CSCO) and General Electric (NYSE:GE) when it focuses on IT for major development projects. GE has a strong niche in cloud IT servicing aviation, defense, utilities, and telecoms and over major organizations. Cisco works with the UN on emergency services and is often utilized on a routine bases in most large-scale development projects.
Oracle will also have to compete with Hewlett Packard (NYSE:HPQ) and Microsoft (NASDAQ:MSFT) as they recently formed a new partnership in providing cloud services for enterprises. The advent of MS Office 2013 and Windows 8 is also expected to have a significant impact in the enterprise sector. Oracle currently has the highest stock price amongst these firms but its $158 billion market cap is lower than GE's $237 billion market cap and Microsoft's $261 billion; Cisco's market cap is around $100 billion.
Oracle provides a lower dividend rate at a higher premium compared with its competitors. Oracle's annualized dividend is $0.24, Microsoft's around $0.80 GE's is $0.68 and Cisco's is $0.32. Oracle's price is 16.5 times earnings; Microsoft's price is around 15.6 times earnings and Cisco is 12.6 times earnings. Oracle's 3.65 price-to-book ratio is the highest among these firms; both GE and Cisco are under two while HP's is 1.1. Oracle's 4.2 price-to-sales ratio is also the highest; HP's around 0.28, GE's 1.5 times sales and Cisco is 2.17 times sales. Microsoft's EPS is $2.00, Oracle's close behind at $1.96 and Cisco's EPS is $1.49.
Oracle has more constraints regarding liquidity; it will need to increase sales to penetrate Cisco and Microsoft's market share while enduring lower margins in this sector. Oracle's debt-to-equity ratio is around 0.38, Cisco's is around 0.32 and Microsoft's around 0.18. Oracle's 1.3 % sales growth in the past quarter was the lowest, Microsoft had 3.9% growth, GE had 2.4% and Cisco had 4.4% sales growth, YOY. Microsoft's 27% return on equity was the highest among these firms, Oracle was 360 bps lower. Oracle's 36% operating margin and 26% profit margin was the highest; Microsoft's was 700 bps and 380 bps lower, respectively.
Oracle is more volatile but garners less interest in the market than firms established in the cloud IT sector. Oracle's average daily volume is only 21 million shares; Microsoft averages 36.8 million while both GE and Cisco average over 40 million. Oracle's beta score is above one and more akin to GE and Cisco. GE stock is the highest performer, up 8.4% in the past month and up 28% YTD through late-September. Oracle's stock is up 2.4% in the past month and up 27.3% YTD. GE recently exceeded its 52-week high while both Oracle and Microsoft are less than 5% below their respective 52-week highs. Oracle's price is up 12.6% since its last earnings release.
Cisco, Microsoft and GE stock have had higher growth in the past year compared with Oracle. Cisco has the highest growth of all-time amongst these stocks. GE has the most growth in the last three months and last six months as well. Oracle may level out as it finds limited market share or growth in the large-scale public and private sector cloud IT projects amongst GE and Cisco. A successful Windows 8 launch in the private sector will help both Microsoft and HP; Oracle is more likely to be negatively impacted in this scenario.
HP and Oracle have both increased over 40% in the past 5 years; HP is more likely to see an uptick with Microsoft, while Oracle will see headwinds as it transitions further into the cloud sector. Oracle offers one of the lowest annualized dividends among these firms. The other firms have more predictable outlooks, more established portfolios in their niche, and offer more favorable opportunities for a higher return on investment.
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.